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LEISURE LETTER (03/13/2015)

TICKERS: MGM, SJM, LVS, PNK

EVENTS

  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results

COMPANY NEWS  

MGM - announced staff pay rises equivalent in some cases to a percentage above the city’s rate of annual inflation for 2014.

 

For non-management workers at MGM Macau earning up to MOP12,000 (US$1,500) per month, the new increment is between 6%-8% of monthly salary. The casino operator said in a statement it amounted in many cases to approximately MOP700 per month per worker for those in that wage bracket.

 

MGM Macau workers earning more than MOP12,000 per month will receive an increment of 5% of monthly salary. All the awards are effective from March 23, the company said.

ARTICLE HERE

Takeaway:  More wage increases for MGM China due to higher inflation. 

 

SJM - CEO Ambrose So has denied that the casino operator is compelling employees to take unpaid leave because it has insufficient work for them to do during the gaming slump, Macao Daily reports.

 

The Chinese-language newspaper quotes So as telling reporters in Beijing that SJM Holdings employees are free to decline its offer of unpaid leave. But they will also not rush to recruit as vacancies occur as before as one of the ways to decrease cost.

 

An internal memorandum circulated among SJM Holdings employees invites them to apply for unpaid leave. So also said his company had no plans to lay off employees.

 

So told reporters that SJM will not file an application with the government to apply for gaming tables for their new Cotai project Lisboa Palace this year.

 

The application will only be submitted once the construction of the project is completed. He claimed that SJM is able to shift gaming tables from its other properties to the new project.


In addition, So revealed that the corporation has financial reserves of some MOP24 billion, claiming it does not have any financial difficulty even though the city’s gaming revenues have dropped for nine consecutive months.

 

Predicting that gaming revenues may still post decreases of 10-15% YoY in 2015, Mr. So stressed once more that he is optimistic about the development of the gaming industry, claiming that the opening of the Hong Kong-Zhuhai-Macau Bridge will attract more gamblers, especially from Hong Kong.

 

ARTICLE HERE

Takeaway: After recent comments from Secretary Leong, no casino operator will force unpaid leave. Operators will need to think about other cost-cutting measures. 

 

LVS - Sands China recommended a final dividend of HK$1.00/share for 2014 year. It will be paid on July 15.

 

PNK - elected Chuck Atwood to Board of Directors. Atwood is currently the Lead Trustee of the board of trustees for Equity Residential (NYSE:EQR), a REIT listed on the New York Stock Exchange and member of the S&P 500.  He is also a member of the board of directors of Gala Coral Group, a private U.K.-based gaming company, and ALST Casino Holdings, LLC, a private Las Vegas-based gaming and hospitality company.

 

Suncity- Suncity is interested in Phú Quốc, an island that is part of the southwest Vietnam province of Kiên Giang, and about 250 kilometres (155 miles) from Ho Chi Minh City.  Suncity also said it was willing to invest in Bai Truong if the current investors withdraw.

ARTICLE HERE

INDUSTRY NEWS

STR: US hotel results for week ending 7 March:

  • Occupancy rose 0.5% to 64.5%
  • ADR increased 2% YoY to $116.74
  • REVPAR was up 2.5% to $75.27  

ARTICLE HERE

Takeaway: US REVPAR growth have been slower recently.

 

AC FEB SS land GGR: -2% YoY

AC FEB I-gaming revenue: flattish at $10.4m


 

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.


CHART OF THE DAY: Multi-Duration Macro (Hedgeye Quantitative Set-Up) $USD

CHART OF THE DAY: Multi-Duration Macro (Hedgeye Quantitative Set-Up) $USD - 03.13.15 chart

 

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

 

For those of you who are new to my average at best sense of humor and risk management lingo, the aforementioned dump of macro signals are meant to contextualize multiple durations:

 

  1. Immediate-term TRADE and “risk range” commentary deals with the very immediate-term
  2. Intermediate-term TREND themes and signals consider a duration of 3 months or more
  3. And if I go all “long-term” TAIL on you, I’m considering the next 3 years or less

 


Project Olaf

“Do you want to build a snowman?”

-Anna

 

If you haven’t seen Disney’s Frozen, you should. I have two daughters and a son. They love that movie. And, I must admit, I think I know all of the words to Anna and Elsa’s songs too!

 

Back to the Global Macro Grind

 

I’m in my favorite fairy-tale place on earth this morning (Washington DC) so I’ll keep this brief as I need to run over to the Fed’s office to have breakfast with all of my buddies over there. We’re going to hammer out how we keep ice cubes from melting.

 

In the spirit of centrally planning things like economic gravity (and Disney’s announced sequel), we’ve named our latest idea Project Olaf. This was inspired by the inflated hopes of Frozen’s first snowman, who thought the sun couldn’t deflate his expectations.

 

Admittedly, while we’re wicked “smart” Ivy League guys, I think this whole idea of ours has some headwinds (like heat for example). “So”, I’m thinking that instead of building a snowman, we should just build a billion dollar ice cube app.

Project Olaf - Fed forecast cartoon 03.02.2015

 

Moving along…

 

These meetings we do in Washington are funny. I think my defense partner, Daryl Jones, and I are the only two Canadian macro guys within 50 miles of this place who aren’t trying to get inside information on what the Fed is going to say next.

 

Notwithstanding the whole orange jump-suit risk part, we’re simply more comfortable reminding our audience that you don’t need that stuff to make and/or save money in macro – you simply need to front-run the predictable behavior of people who chase it.

 

“So”, before I have breakfast with my central planning boys, here’s what Mr. Macro Market is telling me to tell you across 10 Big Macro Risk Management Factors:

 

  1. US 10yr Yield signaled immediate-term TRADE oversold within its bearish intermediate-term TREND yesterday
  2. SP500 bounced right off @Hedgeye TRADE support and now needs to close > 2080 to keep the snowman from melting
  3. Russell 2000 (IWM) ramped +1.7% post our immediate-term buy signal (lower) on red; next resistance = all-time highs
  4. Weimar Nikkei up another +1.4% overnight to +10.4% YTD (vs. SPX +0.3%) signals immediate-term overbought
  5. Germany’s DAX has immediate-term downside to 11,506 after signaling overbought yesterday at +21% YTD
  6. US Equity Volatility (VIX) signaled overbought where I signaled SELL VXX on Wednesday; risk range = 13.03-17.36
  7. US Dollar Index signaled immediate-term TRADE overbought at 99.99 yesterday; bullish TRADE support = 97.46
  8. Burning Euros are straight back down this morning after their 1-day bounce; bearish TREND call remains
  9. Gold is bouncing (small) as the USD stops going up, but remains bearish TREND with a risk range of 1137-1179
  10. Oil (WTI) is probing the low-end of its immediate-term range this a.m., but has no intermediate-term support to $36.35

 

In other words, Global #Deflation remains a much more practical intermediate-term TREND investment outlook than building a snowman of inflation expectations in March.

 

Nope, sorry Olaf. It’s not different this time.

 

For those of you who are new to my average at best sense of humor and risk management lingo, the aforementioned dump of macro signals are meant to contextualize multiple durations:

 

    1. Immediate-term TRADE and “risk range” commentary deals with the very immediate-term
    2. Intermediate-term TREND themes and signals consider a duration of 3 months or more
    3. And if I go all “long-term” TAIL on you, I’m considering the next 3 years or less

 

Yep, more or less. Those are two critical words in risk management as market history will teach you that it’s a lot easier to have:

 

A)     A “longer-term” outlook (more days in your holding period) if volatility is trending lower, and…

B)       less days (more risk managing of your core investments, hedges, etc.) as implied volatility is tending higher

 

If that investing style rhymes with what you’ve realized using real ammo in this game of expectations, good. I’ll lose my boys at the Fed as soon as I start talking about anything that’s non-linear (like volatility). They think they can build an app to “smooth” that too…

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND view in brackets) are now:

 

UST 10yr Yield 2.01-2.24% (bearish)

SPX 2030-2080 (bullish)

RUT 1 (bullish)

DAX 116 (bullish)

VIX 13.03-17.36 (bullish)
USD 97.46-100.31 (bullish)
EUR/USD 1.04-1.107 (bearish)

YEN 119.45-122.01 (bearish)
Oil (WTI) 46.35-49.64 (bearish)

Gold 1137-1179 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Project Olaf - 03.13.15 chart


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 80.64%
  • SHORT SIGNALS 78.61%

Dr. House-ing

This note was originally published at 8am on February 27, 2015 for Hedgeye subscribers.

“There’s no ‘I’ in team. There’s a ‘me’ though, if you jumble it up.”

-Dr. Gregory House 

 

Sometimes pretending you’re a cynical, misanthropic drug-addict doctor with deific deductive dexterity is what it takes to stay excited about staring at your screen for 14 hours a day. 

 

The Dr. House metaphor is both apt and easy as it relates to the Hedgeye Housing teams (@HedgeyeFIG & me) inquisition for industry research alpha. 

 

Distilling the convoluted milieu of domestic housing data in the attempt to diagnose and front-run positive and negative dispersions from industry homeostasis holds obvious parallels to the challenges inherent to diagnosing physiological pathology in the attempt to front-run … death.   

 

Plus..you know..it illustrates our marginal cleverness with the whole “House” reference.

Dr. House-ing - CoD

Anyway, after being on the right side of the acute housing demand infarction in 2014, we reversed our diagnosis for 2015 in November of last year alongside our expectation for a recession and reversal in many of the industries underlying maladies.  

 

Since much of what we like about 2015 is what we didn’t like about 2014, juxtaposing the two years across a selection of key factors should sufficiently capture the core of our call.

 

HPI | 2nd Derivative Trends Matter:  Housing demand leads home price growth and housing stocks follow the slope of price growth.  Since 2008 the correlation between housing equities and the year-over-year rate of change in HPI has been 0.90. 

  • 2014:   Home price growth decelerated sharply in 2014, slowing from ~12% YoY in February to ~5% in October according to CoreLogic data.  The housing complex (XHB/ITB) underperformed the market by ~15% alongside that expedited deceleration in HPI.
  • 2015:  Home price growth stabilized in Oct/Nov across all three of the primary price series (CoreLogic, Case-Shiller, FHFA) and have, in fact, shown modest re-acceleration in December.   Performance has again followed suit with the XHB and ITB outperforming the SPX by +12% and +10%, respectively, since the 2nd derivative HPI stabilization began in November.  Ongoing inventory tightness, with months of supply on the existing market holding below 5 months, remains supportive of stable to improving price growth trends over the immediate/intermediate term.  

Net: In the Chart of the Day below we show the inflection in housing equity performance following the 2nd derivative inflection in HPI. 

 

 

Credit:  Discrete tightening in 2014 gives way to marginal easing in 2015

  • 2014 Contraction:  The implementation of QM regulations, FHA loan limit reductions and the expiration of the Mortgage Forgiveness Debt Relief Act collectively served to constrict the credit box and capsize housing demand in 2014. 
  • 2015 Credit Box Re-Expansion:  Recognizing the discrete drag on the housing recovery, regulatory policy momentum is shifting away from the over-pricing risk for the current wave of would-be borrowers and towards policy adjustments aimed at improving affordability and modest credit box expansion. 
    • FHA & Fannie/Freddie:  FHA premium cost reductions (from 1.35% to 0.85%) implemented in January along with the re-introduction of 3% down payment loan options from the GSEs for 1st time buyers could boost purchase demand by ~3% over the intermediate term. 
    • Vantage Scoring:  The FHFA is currently considering adoption of Vantage Scoring – a credit scoring system which provides a more comprehensive risk scoring framework than conventional FICO models and is capable of scoring thin file consumers previously locked out by FICO and other conventional models.  Vantage Score 3.0 is estimated to score approximately 30-35mm more consumers than conventional models and could bring ~500K more borrowers into the fold in the coming years under conservative assumptions. 

Net: Growth by the stacking of marginal easings in 2015, while likely to be modest-to-moderate, stands in sharp contrast to the restrictive QM/Loan limit reductions that headlined the regulatory environment in 2014. 

 

Ball Under Water:  The Illusion and the Inflection  

  • 2012-2014 | False Perceptions:  Since the start of 2011 there have been ~5.3mn net, new households formed which, using a historically consistent scalar, require 7.2mn new housing units.  However, there have been just 2.97mn housing units started, resulting in a cumulative supply-demand gap of approx 4.2mn units.  This math has underpinned the bullish ball-under-water housing demand/construction thesis for the better part of last two years.  The misunderstanding has been rooted in the reality that the imbalance has been largely illusory as the number of shared households have increased by over 3.4mn over the same period.
  • 2015:  Bear Market in Basement Dwelling:  The increase in shared households slowed markedly in 2014 and the bottom in “basement dwelling” and headship rates now appears to be in.    The implication of an inflection in shared household growth is that what has here-to been a perceived ball underwater becomes, in fact, a real ball underwater and a true support to new housing unit construction.    

 

Rates:  Rates are currently running ~40bps below their 2014 average, providing an approximate 4% boost to affordability.  With global growth slowing, disinflation/deflation predominating and DM yields anchoring the long-end, we don’t see acute upside risks to bond yields in the immediate/intermediate term.

 

Elsewhere Across Housing Macro:  Residential Construction Employment in January saw its largest sequential gain since November of 2005, employment growth across the key 20-35 YOA demographic continues to accelerate and  Consumer Sentiment around housing – as measured by the University of Michigan’s “Good Time to Buy a Home” index – continues to advance alongside the broader rise in Consumer Confidence and ongoing improvement in the domestic labor market.  Further, the latest CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005 and the first material acceleration in year-over-year growth in 8 years. 

 

The 2015 Score | RoC Solid:  Mortgage Purchase Applications were up +9.8% in the latest week marking the fastest rate of growth since June of 2013, Pending Home Sales accelerated to their fastest rate of growth in 18 months in December (we’ll get the January data this morning), New Home Sales in January held at 7 year highs, single-family housing starts were up 16% YoY in the latest January data and home price growth is reflecting a fledgling re-acceleration. 

 

In short, our expectation for improving rates of change across the preponderance of housing metrics in 2015 is finding positive confirmation in the early year data.  Of course, cheerleading a call that’s already worked is generally a great way to top tick yourself, but we still like the intermediate term fundamental outlook.  We’ll continue to let Keith risk manage the exposure in RTA. 

 

Was any of the above analytically ingenious?  Probably not, but having a process for effectively capturing, curating and contextualizing the monthly torrent of shifting housing dynamics in real-time is more than trivial for resource and time-constrained investors.   

 

As Sherlock Holmes (the figure on which Dr. House was based) characterized his investigatory process: 

 

“You know my method. It is founded upon the observation of trifles.” ….”It’s quite exciting, he said with a yawn”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-2.08%

SPX 2091-2120
RUT 1221-1240

VIX 13.08-16.65

USD 94.01-95.45

Oil (WTI) 47.61-50.97 

 

The risk of heart attack rises by 20% on Mondays, Enjoy the weekend. 

 

Christian B. Drake   

U.S. Macro Analyst

 

Dr. House-ing - CoD2


March 13, 2015

March 13, 2015 - Slide1

 

BULLISH TRENDS

March 13, 2015 - Slide2

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March 13, 2015 - Slide4

March 13, 2015 - Slide5

March 13, 2015 - Slide6

 

BEARISH TRENDS

March 13, 2015 - Slide7

March 13, 2015 - Slide8

March 13, 2015 - Slide9

March 13, 2015 - Slide10

March 13, 2015 - Slide11
March 13, 2015 - Slide12

March 13, 2015 - Slide13

 



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