LEISURE LETTER (03/11/2015)

Tickers: SGMS, HOT, RCL, CCL


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


Beijing -  Li Gang, the director of the city's liaison office there, said measures were in place to ensure that officials who head for the former Portuguese enclave "would be discovered". The top official did not elaborate on what specific measures had been introduced but it is common knowledge that identity checks are now carried out on every person who gambles in casino VIP rooms.


"As the crackdown on graft is stepped up, some corrupt officials - including executives of some state-owned enterprises - now dare not go to Macau to gamble. Moreover, because of measures taken by Macau's gambling industry, if such officials go gambling in Macau, they will be discovered," said Li.


Takeaway:  Beijing's watching you - corrupt officials.  And by corrupt they mean any government official.  Perception is reality.





GALAXY - A mainland Chinese worker accidentally fell to his death from scaffolding at the Galaxy Macau Phase II project in Cotai yesterday afternoon, resulting in a suspension of the works at the site ordered by the Labour Affairs Bureau (DSAL). All scaffolding works at the accident site were to be suspended, and the contractor also had to submit an accident report to DSAL.


Takeaway: Another unfortunate accident at a Cotai construction site. Galaxy Ph2 May 27 opening could be delayed.


SGMS - "MONOPOLY MILLIONAIRES' CLUB," the first-of-its kind television game show will launch a new multi-state companion lottery scratch ticket later this month -with as many as 14 state lotteries joining immediately, and more states to follow. Originally created as a multi-state lottery draw game in 2014, the following states will be the first to roll out this exciting new scratch ticket: AZ, GA, IN, KY, ME, MN, NJ, NM, NY, NC, PA, RI, SD, TN.  


Twenty-three states ended the sale of Monopoly Millionaires’ Club last December after just two months of operation, citing lower than anticipated ticket sales.

Takeaway: 2nd time a charm?


Genting Singapore - has authorized repurchase of 10% of its shares. The first repurchase of stock was for 6 million shares totaling US$3.983 million. Genting Singapore has said it will repurchase up to 1.224 billion of its 12.084 billion shares.

Takeaway: And the price keeps getting cheaper


HOT - The James Royal Palm has been sold by Chesapeake Lodging Trust and will join Starwood's yet to be named collection of independent hotels. Temporarily, the hotel will operate under Starwood's Luxury Collection brand, and is slated to join the collection of independent hotels by June.  HEI Hotels and Resorts has taken over management of the hotel.



HOT - is poised to open more than 40 new hotels and resorts across Europe in the next five years, expanding its portfolio by almost 30%.  Starwood is opening five new hotels in Turkey this year, including The St. Regis Istanbul which debuted March 1. In Russia, two new Starwood hotels are opening in 2015 and six more are in the planning stages, doubling Starwood’s presence in Russia over the next three years.


Also on tap is the launch of the Aloft brand in Stuttgart and Munich this summer, and the introduction of the W and Element brands to The Netherlands by year-end


Takeaway: It's a good time to expand in Europe as a weak euro stimulates demand. But in the near term, the plunging euro will hurt reported earnings. 


MCR development - announced it has acquired a portfolio of 18 Marriott and Hilton hotels (the “Portfolio”) for approximately $206 million. Collectively, the Portfolio represents 1,787 rooms across 11 states in growing cities including Charlotte, Savannah, Cincinnati, Tulsa and San Antonio. The Portfolio has an average age of less than 10 years and is unencumbered by management agreements. All hotels were acquired with fee simple title.


MCR will own and manage the Portfolio, which will continue to operate under its respective Marriott or Hilton brand affiliations, with long-term franchise agreements in place. The Portfolio includes multiple brands including Marriott’s Courtyard and TownePlace Suites and Hilton’s Hampton Inn & Suites, Hilton Garden Inn and Homewood Suites.


Takeaway: Large select-service transaction


RCL - Royal Caribbean will kick off a new "BOGO50" offer tomorrow that gives guests who purchase a full cruise fare, 50% off the second passenger and buy one, get one premium beverage package 50% off. BOGO50 offer excludes Quantum, Anthem, Ovation, and Harmony of the Seas, Transatlantic, Transpacific, and China sailings.



CCL - Carnival UK executive VP of operations, David Noyes,  said he believed cruise prices would continue to climb. “Cruising is such great value - we’ll always aim to make sure that’s the case. Clearly as the market continues to grow, I like to think that the price will grow in line with that.”


However, despite Britannia having been designed to emulate a luxury hotel, Noyes insisted that the ship would not always command a premium price. “Prices vary according to sailings,” he added.


Noyes also explained how he envisaged Britannia would help push the number of UK cruisers to 2 million, from the current 1.7 million which cruised in 2013 (latest figures). “Britannia will add 5% to the capacity of the whole UK market, so that will get us close to the two million point.”


Takeaway: Noyes is right. Pricing does depend on demand and so far, it's been mixed.


CCL - Harris CapRock Communications, a premier global provider of managed communication solutions, has increased the bandwith levels to enhance Internet acess in Carnival Cruise Line's ships. For a flat rate of $5 per day (RM18 per day), Carnival offers its passenger the first-ever social media package for an unlimited access to popular social media sites and apps.



Beijing- China's central government says it will soon alter the individual traveler scheme “to better suit Hong Kong’s situation”. These will include refinements to the scheme, which allows residents of 49 mainland cities to travel to Hong Kong, and another arrangement that enables two million Shenzhen residents to use one visa to visit Hong Kong multiple times, according to deputy director of the Hong Kong and Macau Affairs Office Zhou Bo.


Zhou said the adjustments would be a response to concerns raised by Hong Kong Chief Executive Leung Chun-ying over the tourist schemes, and were designed “to make the policy better suit Hong Kong’s general situation”. “The tourist capacity of Hong Kong and Macau have by and large reached saturation, as shown in the studies conducted by the two SAR governments. It does not come as a surprise certain problems occur,” he said.


Zhou did not tell when the adjustments were expected, but said they would come soon.

Takeaway: Changes to travel schemes will not only impact Hong Kong but Macau as well.


Japan-  In a long shot, some members of Abe's Liberal Democratic Party are aiming to resubmit the expired bill to the relatively minor Land and Transport Committee – which deals with issues like removing unsightly utility poles in favor of underground lines. This would bypass the busy, and far more prominent, Cabinet Committee, normally chosen for such major legal changes.


"As long as the ruling coalition can agree and win support, it doesn't matter which committee it's submitted to," LDP lawmaker Takeshi Iwaya told Reuters, adding that more discussion among ruling coalition members was needed.


Takeaway: Last-ditch effort on Japan


CT - Connecticut lawmakers said Tuesday they would introduce legislation to allow the Mashantucket Pequot Tribal Nation and the Mohegan Tribe to open as many as three more casinos in the state.


Takeaway: Exactly what US gaming needs - more supply


Feb Iowa SS GGR: +2% YoY

Feb Missouri SS GGR: +1% YoY


Tripadvisor hotel survey -  

  • While Travel is expected to rise, U.S. traveler budgets remain flat. U.S. travel budgets are expected to average $8,700 in 2015, the same as last year.
  • The U.S. is the #1 most popular destination worldwide according to the places travelers say they visited in 2014 and plan to visit in 2015.
  • In 2013, two in three hotel businesses (67%) felt optimistic about their profitability for the year ahead. This year, that proportion rises to nearly three in four (73%), and is driven largely by more hoteliers feeling "very optimistic" about their profitability for 2015.
  • Half of all properties globally (59% in the U.S.) intend to increase their room rates in 2015, according to survey respondents. 
  • More than one third (35%) of global accommodations and 42% of U.S. accommodations plan to raise rates by between 3-10%, with resorts the most likely to plan increases. 
  • South Africa (72%), Austria (68%) and Brazil (68%) are the most likely to raise rates, according to respondents, with over two thirds of businesses in these markets planning increases. 
  • Accommodations in China will see the biggest reductions in 2015, with 18% of hoteliers planning to decrease room rates, but not by more than 10%


Takeaway: Not surprisingly, US lodging optimism is the high in 2015 while China lags. 


GBTA - Global Business Travel Association slightly downgraded its forecast for Chinese business travel from its outlook published in 2H 2014 due to expectations for slower economic growth in China coupled with continued uncertainty in the global economy. Total spending on Chinese-originated business travel grew an estimated 16.6% in 2014 to $261 billion USD. GBTA projects it will continue to grow 14.2% in 2015, down from our previous projection of 18%, and will grow another 12% in 2016 reaching $334 billion USD. 


“While this is slower growth for China, it is all relative,” said Michael W. McCormick, GBTA executive director and COO. “There is simply no other market to compare China to as their economic engine continues to move forward at a phenomenal pace producing double-digit business travel spending growth. Whether China becomes the world’s largest business travel market at the end of 2016 or the beginning of 2017 does not matter—what matters is that economic policies being set are showing signs of having a long-term positive impact on the economy, which points to a healthy business travel industry for years to come.” 


Takeaway: Chinese outbound business travel growth may slow in 2015 and 2016. 


Asia cruise demand/supply - has overtaken Northern Europe as the third biggest region in terms of passenger capacity, according to independent data from the 2015-2016 Cruise Industry News Annual Report. This year, Asia will grow by 20%, accounting for just over 2.2 million passengers with 69 ships sailing in the region. While Star Cruises remains the biggest operator in the Asian market, Royal Caribbean International will grow by leaps and bounds, adding nearly 200,000 more passengers to its regional capacity YoY. Asia capacity now accounts for just over 10% of the global cruise industry, trailing only the Caribbean and Mediterranean.


Takeaway: Expectations are high for Asia cruise demand in 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.

March 11, 2015

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#Deflation Expectations Here To Stay

Client Talking Points


Remember that Burning Euros and Yens perpetuate what they are trying to arrest (#Deflation). The U.S. Dollar Index +9.9% for the year-to-date now, and European stocks love it – German DAX and MIB Index in Italy both punching new highs at +18.7-19.1% year-to-date vs SPX -0.7%.


Forget about headline news of German Bunds at 0.23% and the Swiss 10YR negative still at -0.13%, the Dutch 10YR Yield of 0.27% is now trading well inside of Japanese Government Bond 10YR of 0.42%! Real Yields in Europe are implying #deflation expectations are here to stay, for now...


After testing all-time highs into FEB end in the II Bull/Bear Survey, the Bull/Bear Spread pulled back from +4460 basis points bullish to +3950 basis points wide this morning as front-month VIX tests the top-end of our current 14.26-17.13 risk range – good morning to be buying U.S. stocks on sentiment alone.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


apparently, Fitch Ratings is forecasting Macau gaming revenues -4% in 2015. um, i'll take the under $LVS $WYNN $MGM $MPEL



To succeed, jump as quickly at opportunities as you do at conclusions.

-Benjamin Franklin 


Boston is 1.9 inches away from breaking it's all-time snow fall record at 105.7 inches for the season.

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 80.46%
  • SHORT SIGNALS 78.35%

CHART OF THE DAY: PCE vs. Unemployment Rate (Stats Don't Lie)

CHART OF THE DAY: PCE vs. Unemployment Rate (Stats Don't Lie) - COD


Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.


In today's Chart of the Day, we look at employment versus PCE going back some 25 years.   As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate.  Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.


Tall Tales

“If you tell the truth, you don’t have to remember anything.”

 -Mark Twain


Let’s call a spade a spade - it’s hard to be 100% honest.   I mean we all stretch the truth a little at times.  Maybe it is small things like saying you are 6’2" when really you are 6’1", or saying your fund was up double digits when really it was up 8.5% for the year.  On some level, it is just human nature to tell a tall tale.


In a paper published in Human Communications Research in 2010, Professor Kim Serota and colleagues attempted to determine exactly how often people lie in their everyday lives.   She conducted an online survey of 1,000 people that asked how many times the participant lied in the last 24 hours, the conclusions were as follows:

  1. The average number of lies told per day was 1.65
  2. Only 40.1% reported telling a lie in the last 24 hours
  3. 22.7% of all lies were told by one percent of the sample, and half of all lies were told by 5.3% of the sample
  4. No statistically significant sex differences were found in the propensity to lie

So undoubtedly you get the ironic point of the survey, the most honest people in the survey were the ones that actually lied the most.


Tall Tales - 44


Back to the Global Macro Grind...


As it relates to central bankers, we haven’t exactly called them liars, but certainly they have misled the investing masses at times.  The one exception to that may be the honest Canadian at the head of the Bank of England, Governor Mark Carney.


Yesterday, Carney said what a lot of central bankers aren’t allowed to say, or are afraid to say, which is that the Bank of England would be “foolish” to fight current low inflation.  Specifically, Carney said that:


“That’s one of the key judgments the MPC has to make . . . the one thing we can’t do and the thing that would be extremely foolish would be to try and lean against this oil price fall today and try to provide extra stimulus up at this point in time.”


Carney’s point was that to add stimulus now would only lead to undue volatility in the English economy - a lesson certainly the Japanese and ECB should be learning in spades, only they are not.


Back in American central banking land, the WSJ’s Jon Hilsenrath, among other Fed watchers, is suggesting the next move by the Fed will be rhetorical in nature.  That is, the Fed is purportedly strongly considering removing the word “patient” from its policy statement.  The implication of this move would be that the door would then be left open for rate increases.  Well, that is assuming Fed insiders aren’t lying to Hilsenrath and his cadre.


In the Chart of the Day below, we look at employment versus PCE going back some 25 years.   As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate.  Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.


Now the caveat to that is that employment, at least on the headline metric of the unemployment rate, is indicative of an economy that is operating at tight capacity.  Employment is also the foundation of the thesis for most equity bulls.   Historically, of course, the employment rate has been much more of a lagging indicator than a leading one.  On this topic, we are actually going to do a deep dive on employment on Tuesday March 17th at 11am on a conference call titled: “Employment: The Good, The Bad and The Ugly”.  Ping sales@hedgeye if you’d like dial in information.


Switching to Hedgeye stock calls, our Internet guru Hesham Shaaban, has been loudly calling out the management of Yelp.  If @HedgeyeInternet is correct in his analysis, Yelp management is likely in the category of the one percent of the sample that tells more than 22% of the lies every day.  In a note earlier this week on Yelp titled, “Hiding the Bodies”, Shaaban wrote:


“We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15.  However, that likely happened in 1Q14.  We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago.  Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.”


So the moral of the Yelp story is, it seems, that if the revenue doesn’t fit your tall tale then just reclassify, but just don’t tell anyone.


The larger issues with Yelp, though, is customer attrition.  By Shaaban’s analysis, Yelp loses roughly 80% of customer every year, so the attrition rate is very high.   Therefore unless Yelp’s TAM (total addressable market) is unlimited, which it is not, eventually growth will slow and dramatically slow for Yelp.   And in a story stock like Yelp, trust me you don’t want to be there when the growth music stops.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.26%

SPX 2034-2080
DAX 110

VIX 14.27-17.13
EUR/USD 1.05-1.08

Oil (WTI) 48.04-50.44 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Tall Tales - COD

The Fed's Road

This note was originally published at 8am on February 25, 2015 for Hedgeye subscribers.

“The Road goes ever on and on… down from the door where it began.”



No, that is not from Janet Yellen’s testimony yesterday. It’s from J.R.R. Tolkien’s Lord of The Rings. It’s also the theme for a walking song that my favorite Tolkien character (Bilbo Baggins) cites in Chapter 19 of The Hobbit:


“Roads go ever ever on

Under cloud and under star,

Yet feet that wandering have gone

Turn at last to home afar.”


While Janet may have been pulled and pushed toward the path of “rate liftoff”, now she’s back to where she, Ben, and their fantasy novel has always been – back to the Shire of money printings and lower-rates-for longer, that is…

The Fed's Road - Deflation cartoon 02.24.2015


Back to the Global Macro Grind


To be clear, The Fed’s Road doesn’t end with green meadows that rest under shining stars. Policies to Inflate, ultimately end in #deflation. And that gets the Long Bond Bulls paid.


Long Bonds? Yes, as in the things that are at all-time highs in Europe and Japan (10yr German Bund and Japanese Government Bond Yields are trading at 0.36% and 0.33%, respectively) as long-term economic expectations there = #deflation.


While the USA’s 10yr Yield has dropped -14 basis points to 1.96% in the last 24 hours, it’s still trading at a +160-163 basis point premium to German/Japanese Long-term Bond Yields. Unless you think US inflation is pending, you’re long  the Long Bond (TLT).


So, thank you Janet – for pseudo telling the truth yesterday. My world needed that! What did she say?


  1. She kept the key-word “patient” in the Fed’s current policy vernacular
  2. She acknowledged inflation expectations being nowhere near the Fed’s “target”
  3. She reminded her fans that she is, allegedly, “data dependent”…


Why do these 3 things matter (in the same order)?


  1. Plenty of funds were pushing the idea that the “patient” language was going to be dropped
  2. Plenty of funds were trying to pull me into the narrative that the Fed “doesn’t care about inflation”
  3. Plenty of funds now realize that the next “data” points are really going to matter!

On the “data”, you need both a calendar and a forecast – here’s mine:


  1. Thursday’s CPI (consumer price inflation) report is going to slow (again) both sequentially and year-over-year
  2. Friday’s GDP report (for Q4 2014) is going to slow (again) both sequentially and year-over-year
  3. Next week’s US Jobs Report (for FEB) is going to do something that I have no edge on


While this game of front-running expectations isn’t easy, if I have 3 data points pending and I’m relatively certain about 2/3, I’d much rather see those 2 face cards first! I think both the bond and stock market see them the way I see them too.


In that regard, yesterday’s real-time market reaction to the Fed taking you right back down the road that they’ve always been on made complete sense to me:


  1. Bond Yields fell, and accelerated to the downside into the close (TLT +1.4% on the day)
  2. The US Dollar stopped going up – Burning Yens and Euros stopped going down
  3. Housing (ITB) and Consumer Discretionary (XLY) stocks led a stock market rally to all-time closing highs


Yes, all-time is a long-time – and that’s why I’ve been saying that it was more obvious to buy longer-term Bonds on the recent pullback than it was to buy the SP500. The 10yr US Treasury bond isn’t back to its all-time high yet = more upside!


But, for those of us who like to buy both stocks and bonds (I wouldn’t have an Independent Research business if I marketed one asset class over another, sorry), we want to be buying the parts of the US stock market that will go up the most.


We call these Sector Style Exposures. In Equities, the 2015 outperformance of the following sectors remains obvious:


  1. US Housing Stocks (ITB) were +2.5% yesterday to +8.8% YTD
  2. Healthcare Stocks (XLV) were -0.1% yesterday to +5.9% YTD
  3. Consumer Discretionary (XLY) stocks were +0.5% yesterday to +5.0% YTD


Whereas the Sector Styles we’d want to be net short (hedge funds) or underweight (mutual funds) like Energy (XLE) and Financials (XLF) are +1.6% and -0.9% YTD, respectively, are underperforming the SP500 (which is +2.7% YTD).


Don’t get me wrong, in a world facing both Global #GrowthSlowing and #Deflation headwinds, a +2.7% YTD gain is nothing to complain about. Being positioned on The Hedgeye Road of Long TLT, ITB, XLV, and XLY has simply been more fruitful.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.07%
SPX 2099-2125

ITB (Housing) 27.01-28.36
VIX 13.22-16.98
USD 93.70-95.18


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's Road - 02.25.15 chart

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