LEISURE LETTER (03/10/2015)



  • March 11 - SGMS 4Q CC, 4:30pm pw: SGMS
  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results



  • GTECH will delist from Milan bourse April 2
  • Planned IGT acquisition could be complete on April 7 (subject to approval of UK court), with merged company trading on NYSE
  • GTECH took a 22m euro loss related to IGT transaction in 4Q 2014
  • 4Q Conf call:
    • In the Americas, same-store revenues were essentially unchanged, as the solid 4.5% growth in Instants and Draw Games was offset by a drop in Jackpot.
      • Contraction in large jackpots: Only 1 Jackpot in the $300m range in Nov
    • Sharp increase in product sales (Oregon VLTs and machines in Latin America)
    • Will retain IL facility mgmt agreement at least through June 2021
    • Achieved lottery contract wins in Minnesota and Mexico
    • Belgium Jackpot was a bright spot
    • Greece: were awarded up to 5,550 of the initial 16,500 OPAP machine in addition to the central system that GTECH had previously won. Still no visibility on timing.
    • Operating income of the Italy segment was impacted by the mix of Machine Gaming revenues, higher remuneration paid to retailers in order to strengthen long-term partnership and the timing of a large marketing campaign for the launch of a new family of annuity tickets. On a full-year basis, however, these factors were more than neutralized, yielding a 3% increase excluding one-off items.
    • Italy sports betting was unlucky despite higher drop
    • IGt transaction: Redeemed 2016 notes in December
    • Jan/Feb 2015: 
      • Italian Lotto performing well.
      • Sports betting significiant growth but with high payouts
      • Stable AWP, declining VLT - but has kept market share
      • International same-store sales are robust

Takeaway: The completion of the integration is proceeding faster than expected.


SGMS - Spirit Mountain Casino selected the Company's Bally systems solutions for its property in Mohave Valley, Arizona.  Spirit Mountain will replace a competitor's systems with the Bally SDS slot management system, which will be deployed across 250 slot machines to manage casino, slot, and hospitality data. 

Takeaway: We believe Bally replaced Aristocrat's Oasis system at Spirit.


CCL - "There may be some people who experiment with both [ships], but I don't see them in competition. Britannia is cruising for U.K. people, Anthem is not that...we welcome [Anthem] to the fray," said Arnold Donald, CEO of CCL.


P&O reports that Britannia, which was built at a cost of £473 million, saw the fastest-ever sales for a maiden voyage in the line’s history.

Takeaway: We don't see a war between Britannia and Anthem either. But both ships will compete with the P&O UK core fleet and some RC brand ships, which has pressured their pricing recently.


Li Gang - The Liaison Office director remarked that the tourist number of Macau cannot grow without any limits because it would affect the quality of life of Macau residents. Asked about the tourism capacity in Macau, Mr. Li said there is no confirmed data related to the capacity. However, he reckons that how much the city can afford depends on whether it can increase its resources for tourists.


Regarding the Macau Government’s suggestion to improve the current Individual Visit Scheme (IVS) for Chinese tourists, Mr. Li perceives that the government should first decide the scale of tourism development by consulting public opinion.  He indicated that only after setting the scale could the government make decisions on whether it should expand, tighten or stay with the current IVS policy.


Takeaway: Window dressing for the public or a serious effort to impede tourism? One more risk factor for this troubled market 


Construction safety record -  While the city is busy with construction works in the Cotai casino-resort sites and other public infrastructure projects, the number of construction-related injuries and deaths are on the rise. This is due to overworking to meet completion schedules and because of the lack of stringent checks on work safety, a contractors’ trade chamber and a labor union maintain.


From January to September last year, a total of 890 people were injured at work on construction sites - a jump from the 789 in 2013 and 564 in 2012.


Takeaway: More scrutiny will likely result in higher costs and delayed projects.


Smoking fines -Between January 1 and February 28 this year, a total of 1,154 instances of smoking in prohibited areas were recorded by authorities, the Health Bureau said in a statement.  Officers have conducted a total of 728,574 inspections in different areas across the city since the Tobacco Prevention and Control Law came into force in 2012. So far, 25,307 people have been accused of smoking in prohibited venues.



Indiana Feb GGR: -2% YoY

Ohio Feb SS GGR: +1% YoY

Takeaway:  February regional revenues is trending into negative territory. Cold and snowy weather offset what should've been a fairly good month


Okada Philippines resort - Tiger Resort, Leisure and Entertainment Inc – developer of Philippine casino project Manila Bay Resorts, originally slated as a US$2.3 billion venture – has reportedly been told it will be allowed to “complete” the resort by the first quarter of 2017.  





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.

CHART OF THE DAY: Are Central Planners Arresting (Or Perpetuating) #Deflation?

CHART OF THE DAY: Are Central Planners Arresting (Or Perpetuating) #Deflation? - COD


Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.


Can the world’s central-planners arrest the #deflation? Or are they now perpetuating it?


To review slide 8 of our current macro deck:


  1. Burning Euros are not going to magically create inflation
  2. Burning Yens are not going to produce inflation “targets” either


Instead, $1.07 Euro (-11% YTD vs. USD) and $121.67 Yen (-1.5% YTD vs. USD) are creating the mother of all ramps in the US Dollar. Picking up right where it spiked to last week, the US Dollar Index is already +0.7% this week to +9.1% YTD.


The Right Words

“A powerful agent is the right word.”

-Mark Twain


From San Francisco to Boston to New York (and today Chicago) I’ve been on the road meeting with a lot of investors in the last few weeks. Finding the right words for macro market risks gets less hard when I boil it down to one - #deflation.


That’s it. One word. You are either positioned for its risks or you are not.


Its risks are far reaching, inasmuch as the opportunities it presents will be. For the average household in America that doesn’t own stocks and bonds it’s a big tax cut. For the average corporation who sells anything with deflating prices, it’s a big headache.

The Right Words - Deflation cartoon 12.29.2014


Back to the Global Macro Grind


Can the world’s central-planners arrest the #deflation? Or are they now perpetuating it?


To review slide 8 of our current macro deck:


  1. Burning Euros are not going to magically create inflation
  2. Burning Yens are not going to produce inflation “targets” either


Instead, $1.07 Euro (-11% YTD vs. USD) and $121.67 Yen (-1.5% YTD vs. USD) are creating the mother of all ramps in the US Dollar. Picking up right where it spiked to last week, the US Dollar Index is already +0.7% this week to +9.1% YTD.


What we call the Correlation Risk (of #deflation) to #StrongDollar remains obvious at the epicenter of where you should be crushing it on the short side and/or have a 0% asset allocation (Commodities):


  1. CRB Commodities Index was down another -0.4% yesterday to -4.7% YTD (with US stocks and Treasuries up on the day)
  2. Gold is down another -0.7% this morning to $1159 (-2.1% YTD)
  3. Copper is down another -1.8% this morning to $2.62 (-7.1% YTD)


In other words, in terms of what to avoid, the easiest question I’ve been answering on the road for the last 6 months remains one word too – Commodities. Why on god’s good earth of deflationary forces would you buy what was the most levered bet on US Dollar destruction into 2011-2012?


Moreover, if you have intermediate-term targets of $1.05 and $135 Euro and Yen, respectively (vs. USD)… and those targets look increasingly probable by the day, why wouldn’t you keep pressing the long Consumer (XLY), short Energy (XLE) position?


A: in a word – “valuation”


Especially when Oil was bouncing, we were getting a lot of “but everyone is short oil and underweight Energy stocks – there’s a lot of value here – why can’t Oil go back to $70?”


In Hedgeye process terms, the words I’ve been using to answer that line of questioning are:


  1. Oil (WTI) has an intermediate-term TREND “price deck” in our model of $36.23-57.82/barrel
  2. Both the net LONG position (futures/options contracts) and curve is looking for higher prices than that
  3. Levered Energy Equities (and their Debts) are not pricing in either the top or bottom end of our range


To be sure, I’d definitely be using the wrong words to describe the most probable #deflation scenario for Energy stocks and bonds if I was a banker. But I’m not a banker. I’m a risk manager. And the only thing I care about is getting to the right words and answers.


If you’re on board with our Global #Deflation theme, we still think the wrong asset allocation answers are:


  1. Buying Russian stocks because they are “cheap”
  2. Buying Greek stocks because they are “cheaper than German stocks”
  3. Buying “your own oil well”


Yes, listen to the radio, you too can buy your own oil well and be called what every other person who got sucked into doing the same for the last year of oil #deflation (one word – lemming).


Finally, we’ve been getting a ton of questions on why German Bund Yields can remain this wide versus US Treasury Yields (0.31% 10yr Bund yield this morning vs. UST at 2.19% = +188bps spread, widest of the year)…


A: I don’t know.


Those are 3 words I have no problem using as I age. The more I learn about macro markets and their histories, the less I know. That said, I still think that if Janet keeps one word in the Fed’s “language” at the March 18th meeting (#patient), US 10yr Yields are coming in hot.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.92-2.27%

SPX 2065-2101


USD 96.85-98.47
EUR/USD 1.07-1.10

Yen 119.21-121.81
Oil (WTI) 48.14-51.77
Gold 1153-1197
Copper 2.55-2.73


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Right Words - COD

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Steering The Boat

This note was originally published at 8am on February 24, 2015 for Hedgeye subscribers.

“My only plan is to keep coming to work…”

-Henry Singleton


I had a lot of encouraging feedback about the book I cited yesterday, The Outsiders, where William Thorndike analyzes the best practices and processes of some of the best CEOs in US history.


Henry Singleton, of Teledyne fame, tops the list and had some fantastic day-to-day leadership advice as a follow-on to the aforementioned quote:


“... I like to steer the boat each day rather than plan ahead way into the future… I know a lot of people have a lot of strong and definite plans that they’ve worked out… but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” (pg 53)


If only our un-elected-central-planners of everything from markets to economic gravity embraced that risk management #process and humility…


Back to the Global Macro Grind


#Flexibility and “data dependence” be damned. Today our almighty overlordess of market expectations (not to be confused with economic realities), Janet Yellen, will predict the parting of the heavens and the smoothing of the seas.

Steering The Boat - Fed cartoon 02.23.2015

Since Mr. Macro Market tends to front-run inside information fairly efficiently, it will be interesting to see if yesterday’s move (lower) in US interest rates will get a love-tap from the Janet’s testimony.


But be careful not to mistake the “rates” trade with the US Dollar #Deflation one. I’ve been on the road telling investors from CA to MA in the last week that while these are not mutually exclusive macro moves, they are moving on different catalysts.


Here’s what that looked like yesterday:


A)     #StrongDollar (+0.5% on the day) > Oil Down -2.8% > CRB Index -1.2% > Energy Stocks (XOP) -0.9%

B)      #RatesDown (10yr -5bps intraday) > Long Bond (TLT) +0.9% > REITS (VNQ) +0.7% > Healthcare (XLV) +0.7%


Healthcare stocks (XLV) have positive quarter-over-quarter performance (returns) in both USD up/down and Rates up/down scenarios (we call those macro environments Quad1 and Quad4), so that’s the easiest S&P Sector to be long (you win both ways).


What’s not easy is being long Energy stocks when the USD ramps and/or REITS when Long-term Rates ramp (i.e. neither work). So this puts a lot of pressure on immediate-term monthly performance chasers as neither A) nor B) are cooperating week-to-week!


Another obvious observation here is how A) and B) are linked on the intermediate-term TREND duration:


  1. USD up + Rates Down > Global #Deflation… and
  2. #Deflation > Junk Debt Risk > Emerging Market Risk > Corporate Earnings Risk


But, have no fear, the San Francisco Fed’s John Williams is here! Being a lifer at the Federal Reserve is not a compliment. John has been there since 1994 and, alongside Janet, missed some large predictions about risk (2000, 2008, to name a few) along the way.


Not to be confused with one of the best American composer’s in US history (The John Williams of Jaws, ET, Star Wars, etc. film score fame), this Williams is more like Brian – a storyteller, but with less NBC Nightly pizzazz.


In assessing the US economy yesterday, Williams said two things in particular that caught my attention:


  1. Employment – he called the jobs market “remarkable” (as in booming, strong, etc.)
  2. Oil – he called the recent #Deflation “transitory” (as in oil is going higher, not lower)


Yes, in case you didn’t know – now you know. Some of the worst forecasters in our profession now have forecasts for everything.


Notwithstanding simple things like long-term mean reversions, price history (Oil averaged sub $20/barrel during both the 1983-1989 and 1993-1999 real US economic demand booms), etc., this storytelling from Fed heads is becoming a massive risk to the economy.


Why? Well, let’s start with where Henry Singleton would… and ask ourselves what is the risk that A) Williams is wrong (Oil remains #deflated, and jobs are at a late-cycle peak) and B) Yellen makes a policy mistake based on these Williams’ forecasts?


I don’t have answers to how all of this plays out. But I do have advice: keep both hands on the wheel and life preservers in the boat.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-2.16%

SPX 2066-2123
USD 93.79-95.36
Oil (WTI) 48.42-51.26
Gold 1185-1215
Copper 2.52-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Steering The Boat - 02.24.15 chart

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Hedgeye Healthcare Sector Head Tom Tobin Talks Short ZMH and Answers Your Questions Live

Hedgeye's Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman give a preview of their SHORT Zimmer Holdings (ZMH) black book call next week and discuss some of their other favorite names in this free Q&A event from earlier today.  




Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%