LEISURE LETTER (02/23/2015)





  • Feb 24: GENTING 4Q CC 4:30am
  • Feb 25: 
    • SJM 4Q CC 6:00am
    • Prestige analyst day (9:00am-12pm)
    • ISLE F3Q 2015:
  • Feb 26: RHP 4Q CC 10:00am  pw: 73087325


Macau government wants to impose a limit to the number of mainland tourists that visit the city, Secretary for Social Affairs and Culture Alexis Tam Chon Weng announced. Mr Tam said tourists already swamp some areas of the city, which has a negative impact on the population’s daily life.


Mr Tam told reporters that the Macau government plans to soon discuss the issue with mainland’s central government. He said no cap had yet been decided and that limits could vary for different seasons of the year. Mr Tam added he hoped the cap could be introduced still this year.


The call to introduce a cap to the number of mainland tourists is not new in Macau. But previously the government had argued that the city still had capacity to welcome more tourists – authorities just needed to better manage the inflow of tourists by directing visitors to less-visited parts of the city.


Takeaway: This doesn't sound good. The profitable grind mass business would certainly be impacted.  What kind of signal does this send regarding the government's desire to see the gaming industry succeed?


MGM - Pacman will fight Mayweather in a super fight at the MGM Grand on May 2.

Takeaway:  It's on. Big win for MGM Grand albeit short term.  Bigger win for boxing fans.


MPEL - Belle CFO Manuel Gana said from Q1-Q3 2014, the company booked P1.2 billion in revenue from the lease to Melco for CoD Manila.  In 2013, Belle realized revenues of P1.3 billion from the lease.  For this year, lease revenues from CoD Manila is expected to hit P1.4 billion.


Gana added that CoD Manila is now mainly catering to the Filipino and needs at least six months to attract high rollers from abroad.  "Since soft opening, it's been primarily mass and premium mass [market]," he said.  


The casino and hotel operations are now in full swing, but the retail business is likely to come on board by April. Asked if China's crackdown on gamers will impact its operations, Gana said "... it's an old story" and the development is spared since City of Dreams Manila is an integrated resort. "From what I understand, it does not affect VIPs. VIP junket operators do not use these offices. These offices are like tourists agencies. They try to attract new mass and premium mass customers. Some integrated resorts have tried to side step the issue by not using the word casino or promoting casino operations," he said. "They promote hotels, restaurants, theatrical productions and other entertainment productions."


Takeaway: For any new property, it will take time to ramp up. For the Philippines market, the locals is the most important consumer segment (70% of customers are locals/ 30% international (mostly big VIP, with Koreans the biggest segment). 


SGMS - announced today that a patent infringement lawsuit against Bally Technologies, Inc.(formerly known as SHFL entertainment, Inc.) has been dismissed with prejudice by the United States District Court for the District of Nevada. The lawsuit was brought by TableMax IP Holdings, Inc., Table Max Gaming, Inc., and Vegas Amusement, Inc. (collectively "TableMax") in August 2009. 


H - Hyatt Place Tijuana opens in Mexico. 

  • 145 roomy rooms, all of which feature a swiveling 42-inch TV, the plush Hyatt Grand Bed and a Cozy Corner sectional sofa with sectional sofa-sleeper

Takeaway:  Select service brands will drive Hyatt's unit growth in 2015


RCL -  A suspected norovirus outbreak has left 95 passengers and seven crew members suffering from vomiting and diarrhea on Celebrity EquinoxThe Celebrity Cruises’ vessel has 2,896 passengers on board and is returning to Fort Lauderdale, Florida, for sanitization after a 10 day cruise.

Takeaway: It's not official but February is Norovirus Month! This year, the headlines have been mostly RCL.


CCL-  While Australia is currently the third largest source market for Seabourn, Tony Archbold, director of sales Australia, said it is closing the gap with the UK to become No. 2 after North America.




Visitation - The Public Security Police (PSP) has revealed that more than 1.72 million people crossed the Macau border checkpoints between February 18 and 22.  Compared with CNY 2014, overall visitation is up 3.2% while Mainland Visitation is up 6.7% so far.


LEISURE LETTER (02/23/2015) - CNY


Takeaway:  While a new record, CNY visitation growth is nothing spectacular.




Las Vegas – The Las Vegas Convention and Visitors Authority (LVCVA) Board of Directors has approved a contract for the purchase of the historic Riviera Hotel & Casino's 26-acre site as the cornerstone for its planned Las Vegas Global Business District (LVGBD). Under the agreement, the LVCVA will purchase the site for a total of $182.5 million.  LVGBD is projected to bring 6,000 construction-period jobs to Southern Nevada, and the construction portion alone is projected to generate $3.6 billion in economic activity.  


The $2.3 billion project is the largest economic development initiative the LVCVA has undertaken since the Las Vegas Convention Center was originally built in the late 1950s.  The expansion project is expected to lead to an additional 480,000 new attendees as current conventions grow and through attracting an estimated 20 new trade shows and conventions.


Envisioned to be completed in two phases, the first phase focuses on the Riviera site and includes 750,000 square feet of new exhibit space and 187,500 square feet of supporting meeting space as part of the new 1.8-million-square-foot expansion.


Phase two focuses on renovating the existing convention center and includes a 100,000-square-foot general session space and another 100,000 square feet of meeting space. Including public areas and service areas, the expansion and renovation increase the facility from its current total footprint of 3.2 million square feet to nearly 5.7 million square feet.  Once construction begins, the entire project is expected to take five to eight years to complete.

Article HERE

Takeaway:  Biggest development for LV in years. 


British Columbia Lottery Corp - expects to improve its bottom line this year thanks to an influx of high-rolling gamblers from mainland China. With lottery sales softening, the Crown corporation and its partner casinos on the Lower Mainland have focused on attracting wealthy “industrialists and businessmen” keen to play baccarat for up to $100,000 a hand.


Jim Lightbody, the corporation’s CEO, said the strategy has paid off in spades.

Total revenue from table games — including high-limit tables — is up nearly 20%, or $80 million, from last year, he said.


Takeaway:  Big Chinese VIP gamblers also moving money to Canada.



S'pore CPI - Core inflation – which excludes changes in the price of private road transport and accommodation since these are influenced more by government policies – rose 1.0% YoY in January, down from the previous month's 1.5%. Looking ahead, the Monetary Authority of Singapore (MAS) said inflation is expected to ease further, before rising in the second half of 2015.


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.

Retail Callouts (2/23): Idea List, KSS, TGT, HIBB, WMT, Ports Deal

Takeaway: Updated Hedgeye Retail Idea List. Wal-Mart wage hike extrapolated to other competitors, Kohl's is the most at risk.


Retail Callouts (2/23): Idea List, KSS, TGT, HIBB, WMT, Ports Deal - 2 23 chart1


JWN: Took off our long bench. The company is guiding to high single digit sales growth, and potentially a down year for earnings. A sandbag? Perhaps. But we can't prove that. And at 21x earnings and near trough short interest, we don't want to be near this one.

NKE: After CFO Don Blair announced his retirement, we booted NKE from our list of Core Long ideas. We always said that he was the ONLY person at Nike we'd be genuinely scared to see leave -- and it's not because of the respect he has earned by the Street. Without him, the organization is likely to change materially -- and we don't yet know if the resulting entity is one we'll like. For now, business is solid. But there's work to do on this name.

RL: We kicked this one to the long bench. A reactionary move -- the kind we never like to make. But the thesis was that after 2-years of investing, RL was accelerating sales, margins and ROIC. Not the case. Now entering another investing period -- by the time it's over, Mr. Lauren will be pushing 80 years. As with Nike, we need comfort on the organization structure here.

TGT: We moved this up a notch on our Short Idea List.  While not expensive relative to the market (TGT is at 17x earnings), we think that cost pressures are building. Not just because of WMT's big pay hike. But because of the actions Cornell will have to take to rebuild TGT's long term growth trajectory.




Retail Callouts (2/23): Idea List, KSS, TGT, HIBB, WMT, Ports Deal - 2 23 chart2





Takeaway: We took the implied increase in annual pay for each Walmart employee, and extrapolated that to WMTs relevant competition for employees. That equates to about $1850 per employee. We think that's a fair estimate given that a bump from $7.25 (current minimum wage) to $9.00 per hour is equal to $3650 per year.


The most at risk:

  1. KSS - This surprised us on a few levels. a) KSS pays the lowest hourly wage of all the big players in this space comparables include: WMT, TGT, M, and JCP ($9.16). b) We applied the wage hikes only to KSS part-time employees. The 106K part-timers make up over 77% of the work force. Add all that up and you get to 100bps in margin pressure and a $0.62 hit to EPS (14% impact to the streets 2015 number). At 1,200 stores, KSS might not face the media pressure of a WMT or a TGT, but it directly competes with Walmart for it's workforce.
  2. TGT - see our note. For the link CLICK HERE
  3. HIBB - This may not seem as relevant, but given HIBB's 'Remora' strategy we think it impacts them as well. Though we'd argue that the 25% employee discount will help mitigate attrition. Adding it all up we get to a $0.24 hit to EPS (8% impact to the streets $3.00 FY16 estimate) and 100bps of margin headwind.

Retail Callouts (2/23): Idea List, KSS, TGT, HIBB, WMT, Ports Deal - 2 23 chart3 





West Coast Ports Deal Reached



TGT - Target sees initiative on organic, natural products to hit $1B in sales this year



Mall of America Heightens Security



RSH - Report: RadioShack cleared to sell 1,100 store leases



APP - American Apparel Fires Both of Its Creative Directors



WAG - to offer patients drug 'reviews'



Prada to Open Vancouver Flagship



Chanel Unveils Rome Flagship





Recent Notes

02/17/15 Post-Presidents’ Day Mashup

02/18/15 NDLS: Going In Short

02/20/15 NDLS: Wet Noodles

Events This Week

Monday, February 23rd

  • QSR at the JP Morgan High Yield & Leveraged Finance Conference 9:00am EST
  • TXRH earnings call 5:00pm EST

Tuesday, February 24th

  • DPZ earnings call 10:00am EST
  • CBRL earnings call 11:00am EST
  • KONA earnings call 4:30pm EST
  • BBRG earnings call 5:00pm EST

Wednesday, February 25th

  • PZZA earnings call 10:00am EST
  • DIN earnings call 11:00am EST

Thursday, February 26th

  • TAST earnings call 8:30am EST
  • PLKI earnings call 9:00am EST

Friday, February 27th

  • DFRG earnings call 8:30am EST





Recent News Flow

This Morning

  • DRI appointed current Interim CEO Gene Lee as permanent Chief Executive Officer, effective immediately.  The company is now turning its attention to finding a replacement for CFO Brad Richmond, who plans to retire at the end of March.  The board will consider both internal and external candidates.

Monday, February 16th

  • RRGB expanded its finest premium burger line with its first seafood option – The Wild Pacific Crab Cake Burger.  It is available while supplies last.

Wednesday, February 18th

  • WEN announced a regular quarterly cash dividend of $0.055 per share available to shareholders of record as of March 2, 2015.

Friday, February 20th

  • PLAY announced the full exercise of the underwriters’ option to purchase 990,000 shares of common stock in connection with the previously announced secondary public offering.  Following the exercise of this option, Oak Hill Capital partners' stake will decrease to 62.1% of the outstanding shares of common stock.


Sector Performance

The XLY (+1.3%) outperformed the SPX (+1.0%) last week.




Quantitative Setup

From a quantitative prospective, the XLY remains bullish on an intermediate-term TREND duration.



Casual Dining Restaurants




Quick Service Restaurants



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

European Banking Monitor: Greek Swaps Tighten on Bailout Extension

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 




European Financial CDS - Swaps mostly tightened in Europe last week.  Greek banks are once again in the spotlight with swaps tightening between -193 bps and -295 bps on news of a last minute, four-month extension to the country's bailout. Even with ~200 bps of tightening, Greek banks are still trading at 1 bps.


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart1


Sovereign CDS – Sovereign swaps mostly tightened over last week with dovish language from the U.S. Fed and an extension to Greece's bailout. Portuguese sovereign swaps tightened by -6.3% (-11 bps to 168 ) and Spanish sovereign swaps widened by 2.9% (3 bps to 107).  


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart2 sovereign CDS


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart3 sovereign CDS


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - 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 tightened by 1 bps to 10 bps.


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart5 euriobor OIS Spread


Matthew Hedrick



Ben Ryan




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 SOYBEANS, SUGAR, and HEATING OIL markets experienced the most BULLISH relative positioning changes week-over-week
  • The ORANGE JUICE, GOLD, and LEAN HOGS markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 sentiment


Commodities Weekly Sentiment Tracker - chart2 sentiment


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

  • The LEAN HOGS, RBOB GASOLINE, and WTI CRUDE OIL markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart3 spot 2nd month spread


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

  • The WTI CRUDE OIL, BRENT CRUDE OIL, and SUGAR  markets are positioned for HIGHER PRICES in 1-year  
  • The HEATING OIL, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - Spot 1Yr. Spread


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 - chart5 open interest


Ben Ryan


Call Summary and Replay: Outlook for Natural Gas Prices and Basis Differentials

On February 18th we hosted a guest speaker call with Keith Barnett of Asset Risk Management (ARM) on natural gas prices and basis differentials.  It was an excellent call, and we recommend you check out the replay and Keith’s slides, linked below:


Link to Audio Replay


Link to Slide Deck


Key Takeaways from the Call


1.  Near-term Henry Hub expectations……Not expecting a spring price crash similar to March / April 2012.  Expects prompt prices to be range-bound below $3.00 in 2015, with the market tightening in 2H16.  “We will trade lower in the prompt.  We are … prepared to see $2.25 in the prompt month with a lot of trading between $2.40 and $2.60, but ultimately … we think the range for settlement of prompt month contracts this summer will average closer to $2.40 / $2.50 with range between $2.30 and $2.75 on the settle, and $2.25 to $2.90 on the actual day-to-day activity.  We do not have to crash the market to solve for a reasonable ending inventory this year …  [Supply] mitigation due to price and rig activity actually begins to tighten the market in ‘16.  The damage carries over into the first part of ’16, but we’re quite bullish the second half of ’16, ’17, and beyond.”   


2.  Natural gas basis expectations……Marcellus/Utica pipelines going to the Gulf Coast and Midwest will pressure basis soonest; projects to move gas to the Northeast and Southeast are more prospective, and will pressure basis later…  General expectation: “The west will be relatively stable and uninteresting, and all the action will be at Dom South, up in New England and New York, and then back down into the Gulf Coast as gas comes down … through all the reversal projects.”  

  • Marcellus/Utica (Dom South) current weakness driven by local “gas on gas competition” for processing and pipeline capacity.  First LNG export could positively impact Dom South basis.  “Dom South is not the most mispriced, but over term, it will move the most for rational, foreseeable reasons.”  Assume tighter Dom South basis longer-term.
  • Houston Ship Channel (HSC) will most likely have a positive basis, especially in the summer due to high TX power burn.  HSC a very important market, it’s the largest concentrated gas market in the US, maybe in the world.  Exports to Mexico and new Texas industrial projects will be very important to the HSC basis.
  • Chicago will be well-supplied and should trade negative, particularly if there is a mild winter in the Midwest. 
  • Mid-Con will be stable for the next 18 – 24 month; “slight” negative pressure later as Marcellus/Utica gas“boomergangs” to the west and south; will be counteracted by Gulf Coast demand pull.  “We see [Mid-Con basis] being more stable than most places.”
  • Texas “won’t be a premium market, but it will be more insulated than Louisiana.”             
  • California is likely to sustain positive basis because it is the most-isolated, furthest trade point from the Marcellus/Utica. 
  • Opal (Wyoming) should be slightly negative and stable.  The Rockies are well-balanced.  Opal may come under pressure as Rex volumes get backed up …  at which case the supply will rotate west.  Will compete with AECO gas for market share in the west. 
  • AECO basis to be cyclical, mainly depending on short-term contracting on TransCanada’s mainline.  “Expect more of the same rhythmic, cyclical price action.”   Outlook for Canadian heavy NGLs is worse than it is for methane and ethane.  AECO basis is a difficult one to call due to TransCanada contracting and Loonie weakness.      


3.  US LNG outlook and price impact……6.7 Bcf/d of LNG export capacity is currently under construction.  “If the current pricing environment holds, only one of the Canadian projects will get done…  I don’t think that the Cheniere greenfield project gets done at these oil prices…”   At current oil prices an additional 3.5 Bcf/d gets built because the inertia behind some projects is so high.  At $75 oil, an additional 5.5 Bcf/d gets built; at $90-100, an additional 8 – 9 Bcf/d.  However, we won’t see that much gas actually getting exported, as some of the projects just provide optionality / trading vehicles.  Sabine Pass Train 1 is likely to come online early; some “test gas” may come in May or June 2015.  “This will affect the market psychologically …  Once we see that first cargo being made, being loaded, being shipped, I expect to see the back end of the market respond.  It’s not going to go up a dollar, but it’s going to respond.”



4.  Impact of oil price crash on US natural gas demand growth……Less exports to Mexico (weaker economic growth, less incentive to switch away from oil for some of their power plants).  “Exports to Mexico will continue to grow, but maybe not as fast.”  Less industrial demand (low oil prices and strong USD = lower margins and returns for US petchem plants).  Less LNG exports (LNG prices sensitive to oil prices, particularly in north Asia).  Before the recent oil crash ARM thought that “demand would definitively, on an annual basis, outrun production growth by 2017, and on a cumulative basis out run it for sure, by 2018.  [Now] that is still true … where 2018 cumulative demand growth does exceed cumulative production growth, suggesting that we will be tighter again by 2017 or 2018. However, 3 of the 4 “Pillars of Demand” are threatened by lower prices…”



5.  Marcellus/Utica takeaway overbuild?......”There is as close to 100% probability of overbuilding as you can get and actually still call it ‘probability’ …  This is America and that’s what we do, we overbuild …  We have such deep, liquid capital markets …  We arbitrage the heck out of things physically, particularly in the energy business.  It’s going to get overbuilt, we’re confident of that, and that does tighten in the Dom South basis.  It doesn’t tighten it as much as you might initially think, but eventually it does …  I don’t think you go premium to Henry Hub because gas is still going to be coming from Pennsylvania to northern Louisiana to satisfy the LNG and industrial projects, and there has to be a negative Dom basis to pay for that pipe …  The floor typically is fuel and variable cost on these new flow patterns …  at $3.50 Henry Hub … we saw the [Dom South] floor at $0.29 back of Henry, which is the fuel and variable cost on one of the legs that we’re confident that’s going to get done and going to be busy.” 



Ben Ryan


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.