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LEISURE LETTER (03/26/2015)

TICKERS: SGMS, CCL

 

EVENTS

  • March 26: Macau Legend 4Q conf call 8:30-9:30pm (EST)
  • March 27: CCL F1Q, 10am -

COMPANY NEWS  

SGMS - currently holds the West Virginia contract to provide the central monitoring system. That six-year, $6.2 million was originally awarded in 2006 and was extended when the six-year term expired. The current contract is set to expire in 2017.

 

WV Lottery director John Musgrave said the Lottery would like to have the bidding process complete a year before the current contract expires to allow for any transition period that might be needed should a different vendor win the contract.

 

Meanwhile, the state’s various lottery games generated nearly $94.7 million in revenue in February, about $2.2 million better than the $92.5 million forecast for the month. However, it was about $4.2 million less than the $98.9 million generated in February 2014. Better than expected revenue from video lottery games at the state’s four racetrack casinos, along with a boost in online games thanks to the $564.1 million Powerball jackpot during the month, helped offset a sluggish performance in limited video lottery revenue during the month.

 

Musgrave said the casinos are seeing a slight increase in consumer spending. He hoped that the improving spring weather combined with improvements in the regional economy will have positive effect on casino revenue in the next few months. “We would like to think we’re seeing an increase in disposable income,” he said.

ARTICLE HERE

Takeaway: Can SGMS hold on to the WV contract? In addition, WV casino revenues haven't seen a growth month since June 2012 due to stifling new competition. The decline will continue in March.

 

CCL - Carnival is ready to order 10 new ships and to sign a construction contract with the two biggest shipyards in Europe, Fincantieri in Italy and the German giant Meyer Werft. 

 

The announcement with the details of the ships, the shipyards involved and the total figure for the agreement are expected by the end of this week, perhaps by Friday. The commission from the American company will be divided equally between Fincantieri and Meyer Werft.

 

The market price for these units would be between $700 and $800 million each, a figure that would bring the total value of the commission for Fincantieri to $4 billion. Other sources confirm that the order, when announced, should include a new class of ship for the Costa Cruise fleet: a 170,000-tonne prototype that could be ordered with a twin ship.

 

The other ships should be divided between the American giant’s various brands, Carnival in particular urgently needing a renewal of its fleet. New ships for Aida are also at stake: the group’s German brand, after the complicated construction of its latest ship in Japan, the “AidaPrima”, Aida decided to build its next ships in Europe. 

ARTICLE HERE

Takeaway: Build it and they will come.... CCL hopes that is the case.

 

CY Foundation - CY Foundation Group Ltd, the parent of Macau-based casino services provider CY Management Ltd, said its plans to expand slot machine operations have to be extended beyond the original deadlines.

 

“Given the recent changes in market environment in Macau, the group has not been able to achieve its target to expand the number of gaming machines in operation to 1,000 by the end of this financial year [on March 31, 2015],” the company said in a filing this week.

 

CY Foundation identified the market changes affecting Macau’s gaming industry as “the enforcement of non-smoking policy in casinos, mainland China’s policies on restricting frequency of visitation to Macau and the anti-corruption drive within mainland China”.

 

The company had said in its interim report in December that its goal was to expand the number of gaming machines in operation to 1,000 by the end of the current financial year, and to 3,000 by the end of the financial year ending March 31, 2017.

 

CY Foundation said it would continue to explore potential sites in Macau and Southeast Asia.

ARTICLE HERE

 

Niraku Holdings - Japanese pachinko operator Niraku Holdings is IPOing in Hong Kong to raise US$49.5 million. Niraku is selling 30 million shares at HK$1 to HK$1.28 each in the IPO, which closes Friday. The money will be used to build five pachinko halls in northeastern Japan.

The $49.5 million is significantly less than the $100 million to $200 million Niraku originally expected to raise.

Niraku is one of four pachinko operators expected to go public this year.

INDUSTRY NEWS

Philippines - SM Investments is considering construction of a casino resort in the southern city of Cebu.

 

Barry Sternlicht- announced the launch of the new mission-driven luxury lifestyle brand 1 Hotels. The first property debuts in South Beach today, followed by Central Park in late spring and Brooklyn Bridge Park at the end of 2015. 1 Hotels celebrates nature while encouraging sophisticated travelers to live well, do better, and connect with the world around them. 

ARTICLE HERE 

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.


Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. It was originally published March 26, 2015 at 07:56. Click here to learn more and subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1

BULLISH TRENDS

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BEARISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide7

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Keith's Daily Trading Ranges [Unlocked] - Slide13

 


Sound Reasoning

This note was originally published at 8am on March 12, 2015 for Hedgeye subscribers.

“You are right not because others agree with you, but because your facts and reasoning are sound.”

-Benjamin Graham

 

That’s one of the concluding quotes in a great book I’ve been citing for the last few weeks, The Outsiders, by William Thorndike. It comes from the final chapter, “Radical Rationality – The Outsider’s Mindset” (pg 197). I love that mentality.

 

I also love getting big Macro Themes right. After beating myself up daily in this forum throughout February as inflation was having a counter-TREND bounce, I’m happy that March looks a lot more like January – Global #Deflation continues to dominate.

 

Was our early January reasoning on an intermediate-term TREND target for the Euro of $1.05 sound? Yes. In stark contrast to how many are describing US Dollar strength today, we started with the most basic premise of all – that Draghi would burn the Euro at the stake.

Sound Reasoning - bruning euro 08.25.2014 large

 

Back to the Global Macro Grind…

 

Burn baby burn. And now what? Now that they have centrally planned both their stock and bond markets to all-time highs (German DAX +20.2% YTD; German 10yr Bund Yield 0.21%), what’s next?

 

Our reasoning is mathematical, so bear with me:

 

1. European growth and inflation data will continue to slow well into Q3…

2. Draghi’s growth and inflation targets will be missed… and… drum-roll…

3. Then he’ll need to provide more #Cowbell, burning the Euro further

 

That’s been our intermediate-term TREND call. In the very immediate-term (i.e. this morning) the US Dollar is finally signaling overbought at 99.99 on the US Dollar Index (which is what implies our $1.05 EUR/USD target).

 

Meanwhile, the European “inflation” data remains deflationary:

 

1. Spain’s Consumer Price Index (CPI) for FEB was still -1.1% year-over-year

2. Germany’s CPI bounced to a whopping +0.1% year-over-year

 

That’s right. After the counter-TREND bounce in things like commodities in FEB, that’s all the Germans got out of Draghi in reported economic terms, a 0.1% inflation reading which isn’t in the area code of the 2% “target” most central planners are hoping for.

 

Hope, as we like to say @Hedgeye, is still not a risk management process. And with March’s reversion to the mean of #deflationary forces firmly intact, the Federal Reserve’s hope that #deflation in Oil and Energy markets is “transitory” is going to look wrong (again).

 

Being right with sound reasoning is one thing. Being wrong, over and over again, on both your growth and inflation forecasts – but representing yourself as right (using stock markets as your validation) is entirely another.

 

NEWSFLASH: centrally planned stock markets should not be confused with economic realities

 

That is, of course, how this gigantic and ideological experiment ends. With central planners attempting to bend and twist economic gravity and ending up right where they started – with both Global growth and inflation slowing.

 

“So”, with European equity and sovereign bond prices pinned up here this should be fun to watch.

 

It’s also been a hoot to watch the Weimar Nikkei, which took it’s inverse-correlation queue from Burning Yens and ramped another +1.4% overnight (+8.9% YTD) to a 15 year high. Yep, that’s crushing the SP500 (which is -0.9% YTD).

 

Oh, you don’t like when I contextualize the almighty US stock market that way? You mean you didn’t tell your clients you were buying the living daylights out of failed Abenomics and shorting the US stock market on the other side of that?

 

What is wrong with you? You definitely don’t deserve 2 and 20 unless you had that reasoning! #kidding

 

But I’m not kidding in telling you that I have my US equity asset allocation (see our dynamic and daily Hedgeye Asset Allocation model in the bottom of this note for how I’d be allocating capital or raising cash after macro moves) at YTD highs, on red.

 

From this time and price, I like US Consumer Discretionary (XLY), Housing (ITB), and the Russell 2000 (IWM) – in that order. I also like Healthcare (XLV) stocks, but in looking for a beta bounce on accelerating US consumption (US Retail Sales are going to be reported this morning), I think there’s more upside in the aforementioned order.

 

If everything that punishes those levered to commodity and/or debt #Deflation doesn’t pay the people in America who have been pulverized by US cost of living, my reasoning will prove to be wrong. Oh, and so will any US GDP forecast that doesn’t look recessionary.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.24%

RUT 1194-1235

Nikkei 18715-19009

USD 96.98-99.99

EUR/USD 1.05-1.08

YEN 119.35-121.91

Oil (WTI) 48.01-50.22

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Sound Reasoning - Slide1

 


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March 26, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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CHART OF THE DAY: Homebuilder Seasonality (Ave Performance by Month, 1996-2014)

CHART OF THE DAY: Homebuilder Seasonality (Ave Performance by Month, 1996-2014) - HB Seasonality

 

Editor's Note: Below is an excerpt from today's Morning Newsletter written by Hedgeye U.S. Macro Analyst Christian Drake. Click here to learn more and subscribe.

 

  • March:  Seasonality | Performance in Housing related equities shows marked seasonality. In short, the housing complex outperforms from Nov-Feb ahead of the Spring selling season and subsequently underperforms modestly in March as (presumably) some of that cumulated optimism comes off and again in mid-year as the heart of the selling season concludes (see 1st and 2nd charts below).  We show the seasonal pattern that has typified the last 20 years in the Chart of the Day

 


Gizmo or Gremlin?

“No matter how much it cries or begs, NEVER feed it after midnight”

-Gremlins, 1984

 

According to 1980’s legend, feeding a mogwai after midnight catalyzes the transformation from cutesy, wellmeant Gizmo to mischievous, malevolent Gremlin.   Hijinks, hilarity, and the creation of the first PG-13 rating ensue. 

 

The spat of soft early March housing demand data had many wondering whether we’d already reached midnight on the current housing inflection and if the fund flows and improving sentiment feeding the multi-month run of outperformance were set to spawn a reversal in the related equity complex. 

 

We think the hour is nearer twilight than midnight… and Gizmo has more to give as it relates to housing. 

Gizmo or Gremlin? - 15

 

Back to the Global Macro Grind….

 

We reviewed our bullish thesis on Housing in a late-February Early Look – see: Dr. House-ing.  The subsequent ping-pong match in housing data over the last month has, at the least, been interesting.

 

In a recent note to institutional clients we compared and contextualized the competing realities promulgated by the March to-date data. 

 

Consider the following juxtaposition: 

 

(False) Reality:   

  • 3/13:  Mortgage Purchase Applications | Purchase demand declined -1.5% sequentially with year-over-year growth sliding back towards the zero line at +0.7%.
  • 3/16:  NAHB HMI | Builder Confidence declined -2pts month-over-month in March, marking the 3rd consecutive month of decline and the lowest reading since July of last year.
  • 3/17: Housing Starts | New Home Starts in February dropped -17% sequentially, posting their biggest month-over-month decline since January 2007
  • March:  Seasonality | Performance in Housing related equities shows marked seasonality. In short, the housing complex outperforms from Nov-Feb ahead of the Spring selling season and subsequently underperforms modestly in March as (presumably) some of that cumulated optimism comes off and again in mid-year as the heart of the selling season concludes (see 1st and 2nd charts below).  We show the seasonal pattern that has typified the last 20 years in the Chart of the Day below.

So, certainly not the numbers accelerating recoveries and sustainable outperformance are made of. 

 

We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 

 

As it relates to builder confidence, the Current Traffic component of the index led the weakness in the composite reading, which is consistent with a severe weather related drop in the flow of active buyers.  The NAHB also cited supply chain concerns, particularly in terms of labor supply.   Residential construction employment saw its largest monthly increase in employment in nearly 10 years in January and employment at the industry level continues to run in the high-single digits.  

 

There is clearly strong demand for labor in the sector, however, wage growth has yet to really accelerate according to BLS data so it remains equivocal whether rising labor demand is, in fact, driving accelerating builder cost pressure and/or labor supply shortages at the aggregate level.  Further, while labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive. 

 

On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. The 57% collapse in starts in the Northeast drove the bulk of the headline decline, again consistent with unusually cold/severe weather weighing on activity.  

 

Sure, seasonality and weather are not new phenomenon but resolving the volatility and vagaries inherent in month-to-month changes in activity in seasonal industries remains challenging despite the best efforts of evolving seasonal adjustment methodologies.   

 

Further, staring at industry numbers from the aseptic environment of a spreadsheet has the sneaking ability to, at times, drive a wedge between expectations conceived in an analytical echo chamber and the practical realities of the underlying business.  Having been in the construction industry, digging a foundation or auguring down to below the frost line to pour piers in frozen terrain is a largely quixotic pursuit. 

 

Anyhow, we expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

 

Reported Reality:  

  • 3/19-20:  Builder Earnings | Reported results for 1Q15 out of the Builders LEN and KBH had both companies beating sales and earnings estimates while reporting strong pricing and accelerating orders growth.  Further, they talked down the weakness in reported Starts in February and guided to incremental margin improvement over the balance of the year with the expectations for continued, ongoing improvement in the demand environment.  We’re not inclined to take management’s word for it but in this particular case, we’d agree on the intermediate term outlook. 
  • 3/23:  Existing Home Sales | Sales of Existing Homes accelerated to +4.7% YoY, marking the fastest rate of growth in 17-months. 
  • 3/24: New Home Sales | New Home sales in February hit their highest level since February 2008 rising +7.8% MoM to 539K vs an upwardly revised January estimate.  More notably, sales were up a remarkable +25% year-over-year and should continue to look strong from a second derivative perspective as we traverse a 5-month period of easy comparisons.  
  • 3/25:  Purchase Applications | Purchase application saw some positive mojo in the latest week, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.

 

What’s our suggested interpretation of this Tale of Two Housing Realities?

 

We’d argue that much of the weakness in the reported February data was weather related and, in effect, created a mini-ball underwater dynamic.  Over the next 6-8 weeks, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity.   

 

Indeed, behind the data volatility in March, the crux of our underlying thesis remains largely unchanged.   Labor market strength + credit box expansion + (very) easy compares should continue to support improving rates of change in housing demand over the intermediate term.  

 

We’ll be hosting our 2Q Housing Themes call next Thursday, April 2nd at 11am to update our outlook for the industry and the related equity complex.  Please contact if you are interested in attending. 

 

No matter how much it [your position] cries or begs, NEVER capitulate at a manic, short-term bottom.

 

Our immediate-term Global Macro Risk Ranges are now 

 

UST 10yr Yield 1.81-1.98%
SPX 2046-2084

DAX 113
VIX 14.03-16.97
EUR/USD 1.04-1.11
Oil (WTI) 42.37-52.28 

 

To hair bands, Hungry Hippos and Volker-style policy sobriety,

 

Christian B. Drake

U.S. Macro Analyst

 

Gizmo or Gremlin? - HB Seasonality


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