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LEISURE LETTER (01/13/2015)

TICKERS: LVS, GTECH

COMPANY NEWS

LVS Cheung Che Kin, a businessman from Hong Kong, has sued Marina Bay Sands (MBS), claiming that he suffered loss and damage when he was not allowed to take over a baccarat game from a combined pool of chips he shared with a friend at MBS.  MBS denies that Mr Cheung has suffered loss and damage and has filed a counter-claim for an outstanding credit amount of $1.96 million, plus 12 per cent interest, from Mr Cheung. No date has been set for the trial yet.

Article HERE

Takeaway:  More credit headaches to deal with for MBS

 

GTECH – Ontario State’s newly launched GTECH Interactive powered online gambling portal PlayOLG.ca has faced several issues since its launch on Friday 9 January, which has left many Ontario online gambling consumers frustrated. Ontario consumers took to social media channels to report website issues regarding game loading times, onsite glitches and flawed geolocation access services which would not allow some customers to register with gambling portal.

Article HERE

 

Amaya Gaming is evaluating non-binding proposals from certain persons for its B2B land-based gaming solutions business, Cadillac Jack Inc

Takeaway:  Amaya acquired Cadillac Jack in Oct 2012 and has been thinking of strategic alternatives for that business since Oct 2014. 

 

Chinese Strategic Holdings Limited – has been in negotiations with a Macau Nasdaq-listed company involving a proposed casino on Tinian Island in the Northern Marianas.  Steps include 1) assistance in the possible application for a gaming license of and for the new hotel complex; (2) facilitation of gaming license applications through its experience, professional knowledge, and understanding it gained through global licensing applications; (3) rendering of consultancy services relating to negotiations between the government and regulatory agencies in the CNMI; and (4) providing advice and enabling TRI to fulfill and satisfy compliance and/or regulatory duties and responsibilities and comply with licensing conditions and requirements imposed by the CNMI government.

 

The plan, according to Townland Consultants, includes two world-class golf courses, 20-30 6-star high-end villa s, mid/high-end 4-5 Star hotel with 300-400 rooms, a retail / dining village, an agricultural cultivation zone which will provide quality food for the hotels on the island, among other attractions.

Article HERE 

INDUSTRY NEWS

Junkets –  Recently, there has been more lower quality VIP players, meaning gamblers that bet less money and pay their debts much later – with some not paying at all. There is also data that seems to suggest that credit flow and junket revenues are diverging with the latter significantly underperforming the former.

Article HERE

Takeaway:  We dismiss any analysis trying to compare trends in country credit flow vs a specific segment of a localized gaming industry over a short period of time

 

Alan Ho arrested – Hotel Lisboa’s executive director Alan Ho (a longtime senior executive at SJM and the nephew of SJM founder and Macau gambling mogul Stanley Ho) was sent in handcuffs to the Public Prosecutions Office Monday morning along with five associate suspects, for running a multi-million-pataca prostitution ring that was based at the hotel.

Article HERE

Takeaway:  It seems nobody is off limits - not even a member of the Ho family.

 

China lotteries – country's main lottery, the Welfare Lottery, achieved officially confirmed sales of 205.96 billion yuan ($33.6 billion) in 2014, up 16.67% YoY 

Article HERE

Takeaway: Positive for SGMS

 

Singapore visitation – Nov 2014 visitation fell 3.6%, the 9th consecutive monthly decline.  Mainland China was the lone bright spot, rising 10% YoY in Nov - its 2nd consecutive monthly gain off of a very low comp.  Indonesia and Malaysia visitation remain weak, falling -8% and -19%, respectively in November.

 

Meanwhile, Singapore's Changi Airport Group reported passenger traffic declined 1% in November.

 

LEISURE LETTER (01/13/2015) - s1

 

LEISURE LETTER (01/13/2015) - 2

 

Takeaway:  Given the number of airline incidents and tighter regulations recently, it's no surprise that S'pore visitation has declined in 2014. This could affect mass revenues in Q4.

MACRO

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. 


Don’t Be Consensus

Client Talking Points

UST 10YR

The UST 10 YR Yield 1.88% now (started the year at 2.17% and Old Wall consensus still has it going to 3.06% by year end?); and the non-commercial net SHORT position in futures/options contracts (CFTC data) is as big as its been in 6 months at -250,163 (and consensus is long SPX Index and Emini contracts on the other side of that!); don’t be consensus.

GOLD

Gold is looking more interesting by the day as the drop in bond yields becomes more pervasive (USD stopped going up too, which helps). We would like to see it hold our TREND support level of $1237 to suggest you buy it back, but we’re in no rush – consensus is currently long Gold (+106,734 net LONG contracts vs. +76,449 average three months ago).

COPPER

Devastating #deflation happening in the commodities asset class year-to-date (CRB Index at 221 was -2.1% yesterday, -29% since June) as both price and supply go the wrong way in the face of global #GrowthSlowing – still bearish on the Dr. (and his cousin KOSPI).

Asset Allocation

CASH 52% US EQUITIES 7%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 9%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

TREASURIES: being long The Long Bond, in size, remains the best place to be YTD - 10yr 1.88% $TLT

@KeithMcCullough

QUOTE OF THE DAY

Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don't turn up at all.

-Sam Ewing

STAT OF THE DAY

Economic optimism hit a 2-year low in Japan,  the BoJ published a quarterly survey Sunday, in which more than 50% of respondents said that they felt worse off than a year ago. Only 6% of the respondents said their situation had improved last year and 7% of respondents said conditions would get better this year.


CHART OF THE DAY: An Eye on Labor Force Participation

CHART OF THE DAY: An Eye on Labor Force Participation  - LFPR

 

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Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by U.S. Macro analyst Christian Drake.

 

In the 1st chart of the Day below we show the 3 major inflections in labor force participation along with the projected decline in participation through 2020 based singularly on changing age demographics.   The multi-decade rise in participation peaked at the turn of the century and should remain in secular retreat through the back-half of the decade.  Improvements in per capita GDP enjoyed over the 1960-2000 period stemming from the rise in the fraction of Americans employed will likely prove somewhat transient.  



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Golden Tickets

“Almost only counts in horseshoes and hand grenades”

 

Golden tickets are, by definition, an exceedingly scarce commodity.  Occasionally they’re found at the nexus of chance and preparation.  More often they’re the product of randomness; the nebular nursery of accidental billionaires.     

 

Golden tickets are not like horseshoes or hand grenades.  Unfortunately, as I’ve learned, half-tickets don’t count.  Neither does simply recognizing a ticket…..even if only a few others have. 

 

Here’s a selection of some of my personal misadventures in golden ticket recognition:  

Golden Tickets - goldenticket 

2002:  I called a fledgling energy drink company and tried to invest $9,500 – all the money I could scrape together as a middle-class college kid with no connections.  They showed some minor interest – mostly I think they were just amused by a kid trying to pitch them on an inconsequential capital investment – but mostly gave me the blow-off.  I followed up a couple times but ultimately abandoned the pursuit.   You’ll know the energy drink company as ROCKSTAR – pioneer in the fastest growing beverage category of the last half-century.

 

2008/09:  I encouraged Hedgeye to pursue an investment in a young yogurt company located in central New York.   That upstart grew into the yogurt juggernaut known as Chobani which catalyzed the Greek yogurt renaissance and jumpstarted the fastest growing food category of the last decade.  Hedgeye was young itself and in the midst of a bid for the Phoenix Coyotes – it just wasn’t the right time.  

 

2015:  I have another idea in pocket but I’m not divulging….yet.

 

Back to the Global Macro Grind...

 

Golden tickets, however, are not the exclusive right of chocolate factory contestants or the providentially charmed.  Modern Macroeconomies of the last century have generally been born with a golden economic ticket that sits latent until the correct demographic and cultural factor cocktail pushes it out of dormancy. 

 

The story of the U.S.’s Golden Ticket can be contextualized simply and is key to understanding both its current economic situation and its intermediate term prospects.  Pulling back the charts and detaching from the myopia of every market minute can be a refreshing exercise as well.

 

Back to Basics:  GDP | Having ‘stuff’ is dependent on making ‘stuff’

 

Real GDP per capita = Average labor productivity * share of the population that is employed

 

More simply, at its core, GDP is the product of how many people you have making stuff and how much stuff each person can make. 

 

That’s about as fundamental as it gets, but the reality underneath that simplicity carries a lot of economic gravity.   The amount of goods and services the collective consumer can consume, on average, can increase only to the extent that each person can produce more (increased productivity) and/or the fraction of the population that is employed increases. 

 

1:  Accelerating Population Growth + Rising Labor Force Participation = Golden Ticket in per capita output

 

The rise of the Baby Boom generation in combination with an acceleration in immigration and the secular rise in female labor participation was a golden ticket event for the domestic economy.     

  • Employment & Participation:  from 1980 to 2007 employment grew 47% while the over 16 YOA population grew 35%, driving the fraction of the population employed from ~59% to greater than 67%.   The concurrent acceleration in the working age population and employment-to-population ratio catalyzed an epochal rise in per capita output and improvement in living standards.  This benefit was a one-shot deal.
  • Immigration:  Foreign born residents grew from 9.7M (~5% of the population) in 1960 to over 40M (~13% of the population) by 2010.  Indeed, from 1 immigration accounted for nearly 30% of total population growth in the United States.  Clearly, immigration has played a central role in U.S. population growth over the last half-century.  Immigration trends over the next decade+ will play an equally important role in determining how gracefully the U.S. traverses the demographic cliff. 

In the 1st chart of the Day below we show the 3 major inflections in labor force participation along with the projected decline in participation through 2020 based singularly on changing age demographics.   The multi-decade rise in participation peaked at the turn of the century and should remain in secular retreat through the back-half of the decade.  Improvements in per capita GDP enjoyed over the 1 period stemming from the rise in the fraction of Americans employed will likely prove somewhat transient.  

 

Golden Tickets - LFPR

 

Real Wage Growth:   Remember that time demand went down, supply went up and price rose…me neither

  • Labor Supply:  The Boomer generations entre into prime working age along with increased labor participation by women drove an acceleration in labor supply.  In isolation, rising supply of labor should have a depressive effect on the price of labor (i.e. the real wage)
  • Labor Demand:  That the US production function is Cobb-Douglass with the marginal product of labor proportional to average labor productivity is very ivory-tower.   More simply, remember that the real wage is the price paid to labor in units of output.    If productivity rises such that each unit of labor can produce more output (and assuming stable prices and end demand)  then the demand curve should shift to the right with both total employment and real wages rising – that’s the basic theory anyway.  As the 2nd Chart of the Day below illustrates, empirically, the data supports the theory with real wage growth closely tracking the trend in productivity growth. 
  • Looking Forward:  Rising labor supply and slower growth in productivity in the decades following 1970 combined to depress real wage growth.  If those secular trends are slowing and/or reversing as most believe they are – i.e. slower employment growth, lower LFPR, moderating population growth – then labor supply growth should slow with tighter supply supporting gains in real wages.  Remember, however, that we’re talking about secular trends and that supply is only half of the supply-demand equation…..

 

Wild-Cards and Inconvenient Truths:  In the long-run productivity gains are the primary driver of economic growth….policy makers have a model for that, right?

 

The fading tailwind of rising population and labor participation suggests that, from here, the onus on real growth will fall increasingly on gains in productivity.      

 

To the extent tech innovation and the ICT driven productivity gains of the late 90’s can re-assert themselves in the back half of the current decade, real wage growth stands to benefit.   Whether higher entitlement spending, debt service costs and an accelerating dependency ratio emerge as material offsets to gains in real income remains to be seen. 

 

It’s also important to note that, despite its centrality to sustainable growth and canonical growth theory, policy makers don’t really know how to model and/or forecast productivity.  They more-or-less just plug something close to 2% into any intermediate and LT forecast because that’s what it’s been, on average, historically.  With growth itself only expected to average ~2% over the intermediate term, that is a huge assumption.    

 

Degree of Difficulty Doesn’t Count:  The discussion above is necessarily simplified but, in this instance, “almost” is probably sufficient  as it captures ~80% of what matters from a Trend perspective and offers an intuitive, tractable review of the growth, employment and income dynamics that have characterized the domestic, Golden Ticket improvement in living standards over the last 50-years. 

 

Understanding the implications of a secular shift in those dynamics alongside a reversal in the multi-decade monetary policy to inflate will be central to effectively navigating the forward Trend. 

 

From a Trade perspective, with Japanese 5Y yields at 0%, 10Y Bunds at 0.47% and the U.S. 10Y at 1.88% this morning, we continue to watch global deflationary forces swamp enervated inflationary policies in real time.    With Global growth slowing and deflation predominating, our most important macro call remains Long the Long Bond. 

 

It’s not a particularly sexy position or an especially complicated thesis but as Buffett is fond of saying… ”Degree of Difficulty Doesn’t Count” in (macro) investing. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1

Russia (RTSI) 708-796

VIX 17.31-21.99

USD 91.77-93.22

Oil (WTI) 44.41-49.98
Gold 1 

 

Best of luck out there today,

 

Christian B. Drake

U.S. Macro Analyst

 

Golden Tickets - Productivity


January 13, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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Cartoon of the Day: Drip, Drip

Cartoon of the Day: Drip, Drip - oil cartoon 01.12.2015

Oil continued its epic plunge falling another 5 percent today to near six-year lows.


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