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LEISURE LETTER (12/19/2014)



  • Dec 19: CCL F4Q earnings call:
  • Dec 20: Trump Taj Mahal Closing - CANCELLED

Today's Headline Story

Macau DICJ Not Expect GGR Growth Until Mid-2015 – Leong Man Ion, deputy director of Macau’s Gaming Inspection and Coordination Bureau (DICJ), is not expecting year-on-year growth in gross gaming revenue (GGR) in Macau to resume before mid-2015.

Article HERE

Takeaway:  We're currently forecasting a return to growth in September.


FLL – announced, Deborah J. Pierce resigned her role as a Chief Financial Officer of the Company, effective as of December 26, 2014.

Article HERE

Takeaway: Not entirely surprising given the arrival of new CEO Dan Lee.


577.HK – Louis XIII announced Beijing builder Jangho Group Co Ltd Macau subsidiary, Sundart Engineering Services (Macau) Ltd, was awarded a HK$70.5 million (US$9.09 million) contract to fit out the Louis XIII hotel standard rooms, superior suites and corridors. The build-out will occur over the next nine months. 

Article HERE

Takeaway: Progress continues at Louis XIII but no table game allocation to date.


PENN – Live Nation on Wednesday announced a multi-year agreement with Hollywood Casino to become the new name-in-title sponsor of their popular amphitheater located in Maryland Heights near St. Louis. The new venue name is Hollywood Casino Amphitheatre.  In 2014 the venue, formerly known as Verizon Wireless Amphitheater, hosted approximately 400,000 guests.

Article HERE


HOT – announced next year the company will eliminate Internet charges across most of its properties. As of Feb. 2, Starwood Preferred Guest loyalty program members booking through Starwood's brand websites and mobile apps will get free Internet access at "the majority of the portfolio." 

Takeaway: Free internet is becoming the industry norm for loyalty card members


LHO – The Portland Business Journal is reporting the Heathman Hotel was sold to LaSalle Hotel Properties. London-based Taylor-Clark Inc. announced in September it was selling the 150-room, 10-story Heathman Hotel, at 1001 S.W. Broadway, and the 91-room Heathman Hotel Kirkland in Seattle.

Article HERE


PEB – announced that it has acquired the 356-room Revere Hotel Boston Common, an attached 826-space parking garage and an adjacent land parcel for $260.4 million. In 2015, PEB forecasts the hotel will generate EBITDA of $18.0 to $18.5M and net operating income after capital reserves of $16.2 to $16.7M.

Takeaway: This UUP scale hotel traded for forward 14x EBITDA


CCL – 2 new ships

  • Carnival Cruise Line brand with 3,954 berths, scheduled for delivery in March 2018
  • Holland America brand (new Pinnacle class) with 2,650 berths, scheduled for delivery in late November 2018

Article HERE

Takeaway: Carnival Corp now has 10 ships on order 


CCL – Carnival is turning to the Super Bowl to market together – for the first time – all nine of its brands, which include Carnival Cruise Line, Holland America, Princess Cruises, Cunard, Seaborn, AIDA Cruises, P&O Cruises in Australia and the U.K. and Costa Cruises.

Article HERE


NCLH – Norwegian Cruise Line became one of the first major cruise companies to roll out a promotion for Wave Season. NCLH says customers who book a cruise of five nights or longer by Jan. 31 can choose a free Ultimate Dining Package, a free Ultimate Beverage Package or up to $300 in on-board credits. Customers booking a cruise in Europe or Hawaii can choose two of three offers. Under the terms of the Freestyle Choice offer, as it's being called, customers must book an ocean-view or higher category of cabin. Customers booking a suite or a room in the upscale area on Norwegian ships known as The Haven will get all three offers.

Article HERE


Macau Challenges Highlighted as President Xi Visits – a WSJ story reviews the issues facing Macau as the Special Administrative Region attempts to grow and diversify its economy (which until recently was entirely built on gambling) in the face of Mainland money laundering enforcement and attempts to stem the flow of capital out of China.

Article HERE

Takeaway:  Relief rally in the stocks after he leaves?


China Lottery Sales – China lottery sales increased 24.4% to $5.567 billion in November.  Sports Lottery sales rose 31.6% to $2.593 billion while Welfare Lottery sales grew 18.8% to $2.974 billion. Lottery sales were up in 28 provinces and cities in November, the exceptions being Gansu and Liaoning provinces and Beijing, according to the ministry’s data published this week. 

Article HERE

Takeaway:  Mainland lottery sales continue to be robust.


Trump Taj Mahal  – Carl Icahn announced he will "provide up to $20 million of additional financing to keep the Taj operating throughout the bankruptcy proceedings, will also work collaboratively with the State of New Jersey, Atlantic City and the Union to try to forge a global settlement that will bring real stability to the Taj and its employees."

Article HERE


New Orleans Considering Smoking Ban – New Orleans City Council is considering an ordinance to make it illegal to smoke in bars, casinos, parks, at bus stops, work places and other public venues such as the zoo and festivals. Bars, restaurants, video poker outlets, tobacco wholesalers and gambling halls — including the big downtown casino, Harrah's New Orleans — have come out against the measure and vowed to fight it. Businesses that allow smoking worry about a loss of revenues, at least in the short term. Proponents of the ban say studies show business increases over time following a smoking ban.

Article HERE

Takeaway:  Potential negative for Harrah's New Orleans.


South Dakota Free Play Not Taxable GGR – South Dakota Supreme Court ruled free play in casinos should not be subject to state taxation. 

Article HERE

Takeaway:  Good news for the Deadwood Casinos.


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. 

#Deflation Expectations

Client Talking Points


Don’t forget what triggered #Deflation’s Dominoes to begin with (Japan and Europe burning their currencies = Dollar Up, Oil Down, Commodity Correlation Crash, High Yield Spread Rip, etc.) – we signaled short Yen, buy Nikkei on Tuesday (#timestamped 10:29AM in Real Time Alerts), and still like that Macro Idea to express #Quad4 deflation.


3 big things happened this morning (German deflation of -0.9% year-over-year in the NOV PPI, central planning talk of making QE the periphery’s burden, and Italian, Spanish, Russian equity markets all resuming their bearish TREND declines); we do not think ECB President Mario Draghi can get a big thing done in JAN to stem this European Equity draw-down.

XOP (Oil & Gas Stocks)

On the bounce yesterday we registered another big time SELL signal not in the almighty navel gazing Dow, but where the alpha is at on the short side = Energy Stocks! From a Macro Themes perspective, we’ve had this SELL idea on for the entire quarter, and say short more into the end of the quarter.

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


Watch @KeithMcCullough on @FoxBusiness w/ @MariaBartiromo at 9am ET for a full hour. They'll talk markets, economy and more.



Stop walking through the motions of a conditioned routine and start consciously taking action on your visualized intent.

-Steve Maraboli


Russia derives about 50% of its budget revenue from oil and natural gas taxes and 25% of its GDP is linked to the energy industry.

CHART OF THE DAY: Positioning for Fire $LNCO

CHART OF THE DAY: Positioning for Fire $LNCO - chartofday


Editor's note: Below is an excerpt from today's Morning Newsletter written by Hedgeye Energy Sector Head Kevin Kaiser. 


I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 


I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…

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Positioning for Fire

“From the elevation of retrospect we can see it all coming together more clearly and sooner than those who were there and running.”  - Norman Maclean, Young Men and Fire

On August 5, 1949 fifteen young men parachuted out of a C-47 transport plane to fight a wildfire in the remote forests of central Montana. 


It was the dead of summer in the middle of an extreme heat wave.  On the day of the jump it was 97 degrees, then the hottest day on record in Helena, Montana.  The fire danger rating was 74 out of 100, which meant “explosive potential.”  It was so windy that the turbulence onboard the plane caused one of the men not to jump, return to the base, and immediately resign.  The men that did jump landed on a steep slope in Mann Gulch that was covered in dry, knee-high grass… 


Within two hours of landing all but three of the “smokejumpers” were dead. 


What happened in Mann Gulch that day was one of the greatest disasters in US forest-fire fighting history.  The lessons learned from the tragedy had a significant effect on how the US Forest Service fought wildfires for years to come.


Positioning for Fire - top pic for EL


I think of wildfires a lot like I do investment research, in that the identification and understanding of an unstable system is the primary goal.  A wildfire occurs because existing conditions allow it to: the forest is dry, it’s hot, it’s windy, and there hasn’t been a fire in a long time.  As conditions become more extreme, the probability of fire increases.  So, as a fundamental analyst, I try to figure out where the hot, dry forests are before everyone else does, and before they go up in flames.


The instantaneous cause of the wildfire – the “catalyst” – is a secondary concern, and often, unpredictable.  If the forest is dry and hot enough, any small spark can set it ablaze, at any moment.  Will it be an irresponsible campfire?  A bolt of lightning to a dead tree?  A cigarette butt thrown from a car window?  It doesn’t really matter because the result is the same, the forest burns down.


Didier Sornette, an expert on financial crises, summarizes the point:


“...a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. Essentially, anything would work once the system is ripe… a crash has fundamentally endogenous, or internal origin.”


I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 


I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…


…And then the price of crude oil tumbled from $100 to $55 per barrel, prompting more investors to doubt the sustainability of LINN’s business model, and sell.  The prices of LINN’s stocks and bonds plummeted quickly; in just three months LINE and LNCO fell 60%, and the unsecured bonds lost 25 points.  The “catalyst” is now clear, as it always is in retrospect.  It was the oil price collapse, though it easily could have been something else: a failed acquisition, an SEC enforcement action, a rise in interest rates, another leg down in the natural gas price, or something else I never even considered.…  It doesn’t matter – we were well positioned for any small disturbance to trigger the instability.


Our latest energy investment idea is an unstable situation of a different kind – and this one we like on the long side.  Natural gas pipeline MLP Boardwalk Pipeline Partners LP (BWP) trades at a 50% discount to its peer group because it doesn’t dividend out all of its cash flows.  Investors are still sour from the February 2014 distribution cut – which we called for in advance – and have not recognized the positive turn that BWP’s business took this year.  In our view, this is an unstable system waiting for a trigger to re-rate the stock higher...  (Ping us if you’re interested in learning more about our work on BWP.)


What else in the financial world is at risk of going up in flames?  Like the Mann Gulch disaster of 1949, it’s not always easy to recognize an unstable system for what it is…  Are you prepared and well positioned for the lightning strikes and errant campfires that will invariably come?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.23%


RUT 1130-1199

VIX 15.21-24.58

Yen 116.97-121.38

Oil (WTI) 52.02-58.32 


Kevin Kaiser

Managing Director


Positioning for Fire - chartofday

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The 3 and 0 Count

This note was originally published at 8am on December 05, 2014 for Hedgeye subscribers.

“When your enemy is making mistakes, don’t interrupt him.” – Billy Beane


This week I had the pleasure of presenting the state of Hedgeye’s Research engine to nearly 60 of my colleagues throughout our Firm. There were about a dozen key conclusions, followed by a spirited dialogue (which is part of our DNA). But there was one key component  of our discussion that I believe is relevant to not only our own team internally, but also to our customers, without whom Hedgeye would not have had such a banner year in 2014.  That component is how our business model is structurally different, and how it allows us to think, act, and produce money-making ideas in ways that are dramatically different from the #OldWall.


The 3 and 0 Count - t7


The Model: WallStreet2.0

Before understanding how we generate ideas, it is important to understand the structure that allows us to do what we do – on a repeatable basis. Consider the table below. I compared an OldWall model against Hedgeye on some key operating metrics. The #OldWall could be your typical bulge bracket ibank, a regional research firm, or pretty much anyone else who is in the business of selling research. Let’s compare and contrast…


1) Stocks Covered: A typical #OldWall analyst will have a fixed coverage universe between 12 and 18 stocks. It takes an average of one month per company to ‘initiate coverage’ on a new name (been there, done that).  If you ask that person about a name on the fringe of their coverage, they’ll likely answer “sorry, I don’t cover that”. They’re not allowed to have an opinion without an ‘official’ rating. Note: if an analyst at a Hedge Fund told his/her PM that “I don’t cover that”, they’d soon be out of a job. At Hedgeye, the typical Sector Head has about 100 names under coverage. In Retail, the sector I have the privilege of covering, there’s about 130 names I track regularly. No one at Hedgeye will ever utter the words ‘I don’t cover that’. They might say something like “I’m not familiar with it right now – can I get back to you in a day?” But “I don’t cover it” is not in our vernacular.

Does that mean that I have a ‘call’ on 130 names? Absolutely not. But I have a tremendous playing field from which to source big ideas. I hold myself responsible – as do the other Sector Heads at Hedgeye – to have a repeatable process in place to consistently fish where the fish are.  By the time a company works its way through our vetting process, we’ve checked enough risk management boxes such that it’s like a batter stepping up to the plate with a 3 and 0 count. Chances are grossly in favor of that player getting to first base – at a minimum.


2) Big Calls: The way I see it, if I can’t find at least three big longs and three big shorts at any given time out of a group of 130 stocks, then I don’t deserve my seat.  Plain and simple.  If I were to look at those 130 charts (which I do every weekend) I can assure you that there’s a heck of a lot more than three names that doubled last year, and three that got cut in half.

Let’s add another dimension to the concept of a Big Call. Actually, let’s add two more. Now I’m talking Keith’s language -- TRADE, TREND and TAIL. We’re asked so often why we don’t have ratings. The answer is that the concept of a ‘rating system’ is broken.  What if there is a name that we think will double in 18 months, but is going to miss the upcoming quarter by 20%? It might be a short for a more nimble investor, or a long for someone with a 3-year duration that looks through quarterly earnings oscillations (admittedly not many of those people exist, but you get the point). It’s our job to help customers navigate the duration curve.


The 3 and 0 Count - mcg1


3) Percent Short: Roughly half of our calls are short. And I’m not just talking about TRADE positions. Each of our Sector Heads has about half of their respective calls on the short side. Heck, our Energy and Internet Analysts have nothing BUT shorts – and they have an enviable track record (check out Kaiser’s call on LINE). The reason why I note in the table above that 0% of Sell-Side calls are Short is that I have yet to see an #OldWall report that actually uses the word ‘short’. About 10% of ratings in an informal check were either Sell or Underweight. But none made an outright short call, and the average price decline was only 5% (which is hardly shortable in today's liquidity environment).


4) Expected Return:  The average expected upside for Buy ratings on the Sell side is about 12% for Retailers.  If I’m investing real money, I’m probably not going to get too excited about something that gives me a 12% return, unless there is zero potential for downside (which is impossible).  In my little world, I’d point out Restoration Hardware, which is a name we’ve liked since $32 (it’s $84 today), and we still think it’s a winner. For those that like it on the sell side, the debate seems to be whether it will be a $90 stock or a $100 stock.  From where I sit, the bigger question is whether it is a $200 vs $300 stock. Will it get there tomorrow? No. But by 2018 I think RH will earn $11/share. The consensus is at about $6. It looks expensive today if you believe the Street. But it’s extremely cheap if I’m right.  I can guarantee you that if I were at my former (sell side) employer, I literally would not have been allowed to go out with estimates and a resulting equity value that was so far outside of the mean.


One of the inherent challenges to having such a broad coverage approach is that we’ll miss some big moves. With a list of 130 stocks, I can guarantee I’ll miss some big longs and shorts in 2015. I’m not happy about that one bit, but as long as I’m right on the names I pick and help our customers make money, then that’s a win from where I sit.  As long as we stick to our process and keep stepping up to the plate with a 3-0 count, I’m downright excited about what 2015 has in store.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.30%

SPX 2037-2079

RUT 1148-1190

Nikkei 16,098-17,930

VIX 11.71-14.38

WTI Oil 62.99-70.64


Get on base,


Brian McGough

Managing Director and Retail Sector Head

Early Look

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