LEISURE LETTER (03/30/2015)


CZR - CEO Loveman said on CNBC, "Things in Vegas are getting better." The gambling mecca "is more buoyant, in large part because supply has been stable now for some time, demand patterns are improving, the convention and meeting business is robust," Loveman said. "We've enjoyed a great start to March Madness, which is always a good time for us."



Galaxy- Francis Lui Yui Tung, vice chairman of Galaxy, said, "You cannot expect that from now on all the profit growth you [Macau operators] have enjoyed for the last 10 years is going to continue… So personally, I think, [that] you have to adjust yourself to make sure that in the next 10 years’ time you will be equally profitable.”  “We used to have 38 tables at Grand Waldo, so the initial plan is that we could bring 30 tables back in,” stated the executive.


Asked about reports that Macau government proposals to amend the Individual Visit Scheme (IVS) system of inbound visas for mainland travelers to Macau had been submitted to Beijing, Lui said: “I have no information that ideas on the IVS policy have been sent to Beijing. I have been reading in the newspaper that there are talks we should review the IVS policy, making sure it is not going to interrupt the lifestyle of the citizens of Macau. I do agree you can’t forever keep pumping people in here [Macau]. I think you have to encourage quality customers to come into Macau and make sure there is a balance [of locals’ interests and visitor interests].”


Takeaway: A new normal is here for Macau. Galaxy Ph2 may only get 150 tables.


AMAYA - sold Cadillac Jack to AGS for C$476 million comprising cash consideration of C$461M, subject to adjustment, and a C$15M Payment-in-kind Note, bearing interest at 5.0% per annum and due on the eighth anniversary of the closing date.  Sale is anticipated to close in 2015.


Landing - Landing International Development Ltd confirmed that negotiations for the company to acquire the foreigners-only Alpensia casino at Holiday Inn Resort in Pyeongchang, South Korea, have ended without a deal. “Some of the conditions set out in the…sale and purchase agreement had not been satisfied or waived and no extension of the long stop date had been agreed; hence, [the] sale and purchase agreement lapsed on 28 February 2015,” the company said in a filing on Friday.



SGMS - announced that the El San Juan Resort & Casino, a Hilton Hotel in Puerto Rico, has selected an array of Bally systems and games products to upgrade and enhance the property's overall gaming and entertainment experience. 


As part of this technology upgrade, El San Juan Resort & Casinowill also install 56 new Bally-branded slot games, including the award-winning Pro Series Wave cabinet and such premium titles as 88 Fortunes, Michael Jackson Wanna Be Startin' Somethin'TM, The Magic of David CopperfieldTM, TITANIC, and ZZ Top Live From TexasTM. The casino operator is also installing Scientific Games' Shuffle Master Blazing 7s blackjack progressive side bet as part of its technology upgrades.


Graft - Two senior officials with Macau’s Marine and Water Bureau are under investigation on suspicion of accepting bribes to commit illegal acts, the city’s Commission Against Corruption  said on Saturday night. Both of the officials, who were not identified, have been taken off public duties, the commission said in a statement. The pair have also been restricted from leaving Macau.



Japan - Prospects for legalizing casino gambling in Japan suffered another blow on Monday as proponents said they would delay a bill allowing "integrated resorts", as the ruling coalition remains divided on the controversial measure.


Pro-casino lawmakers had said last week they would resubmit a previously failed bill by Tuesday, the end of the fiscal year. But they backed away from that plan on Monday as efforts continued to get the backing of the junior partner in Prime Minister Shinzo Abe's coalition.


Takeaway: Could be nail in coffin


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.

McCullough: Don’t Chase Charts!


In this excerpt from today’s edition of The Macro Show (click HERE for the full replay), Hedgeye CEO Keith McCullough reveals how he looks at volume relative to price when analyzing a security, and how moving averages trumpeted by traditional media don’t show the whole picture.

RH – Positive 10k Disclosure on Revenue Pipe

Takeaway: We expected to see deferred revenue pop this qtr, but not +37% -- the highest rate since 2Q13. The setup for RH remains outstanding in 2015.

Conclusion: Deferred revenue at RH accelerated to +37% in the quarter. That makes sense to us given the port issues and lower inventory numbers (Inventory growth was below sales growth for the quarter, which for RH at this stage in its growth plan is a problem). But, it gives us a lot of confidence in the company's ability to deliver on the top line.


Since 2Q13, this line item has been an exceptional indicator of growth in the upcoming quarter -- over the past 7 quarters, R2 = .923.   Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter.


The point here is that deferred revenue is the highest we've seen in over 6 quarters. Port disruptions probably explain a part of the growth, but we'd also point out that due to the late Source Book release this year, orders were pushed later into 2H when compared to last year. The last time we saw the same level of deferred revenue growth (coming out of 1Q13), the company posted a 38% combined brand comp and 39% consolidate revenue growth. It's not likely that we'll see that type of sales growth in 1Q as the port bottlenecks will curtail the product and revenue flow in 1Q. But, the order and demand pipeline look very healthy headed into the new year. 


RH – Positive 10k Disclosure on Revenue Pipe - rh def rev


Other 10k Callouts


Ad Spend - Marketing expense was up $32mm for the year (in-line with our Source Book cost math), and delevered by 80bps. That was driven almost 100% by the doubling of the Source Book page count. Those costs are amortized over a 12-month time period dependent on the sales curve. We should note that capitalized catalog costs were down 5% YY, compared to FY13 year end when capitalized catalog costs were +53%. Based on the commentary from the 4Q14 Q&A, RH will add additional mailers this year as it decouples the Baby&Child and Outdoor books from the 17lb source book and add two new concept mailers in the fall. But, the company will be more prudent this year on who and what it sends to its bulk mailing list in 2015. We're expecting significant ad leverage in 2015.


No Growth?

Takeaway: Domestic economic growth remains fairly anemic with mounting risks to the downside as we progress through the balance of the year.

The Good: With the inclusion of this morning’s [fairly soft] personal income and spending data, Real PCE (~70% of GDP) is averaging +3.2% YoY for Q1-to-date (up from ~2.8% in Q4). That remains supportive of our #Quad1 forecast for 1Q15.


No Growth? - Personal Income   Spending


The Bad: Outside of housing, not one key economic indicator category is accelerating on both a sequential and trending basis. This pervasive lack of economic momentum will become a major headwind to annual growth rates once base effects become unsupportive throughout the following two quarters. Our full-year estimate of +2.4% real GDP growth – which is already well below the Street and below the Fed’s latest downwardly revised target(s) – could have a 1-handle on it by the time Q3 GDP is reported if growth surprises our expectations to the downside over the next 3-6 months.


No Growth? - U.S. Economic Summary Table


The Ugly: If GDP comes in at the +3% YoY midpoint of our GIP Model forecast range in 1Q15 (up from +2.4% in Q4), the QoQ SAAR growth is likely to be in the +0.2-0.3% range (down from +2.2% in Q4). As always, we should not anchor on any QoQ SAAR forecast given its sensitivity to even the most marginal changes in our YoY growth rate forecast range, but just being in the area code of 0% sequential growth is not good. It’s worth noting that “forecast” is perfectly corroborated by the Atlanta Fed GDPNow Model, which many FOMC and market participants anchor on.




The Conclusion: We reiterate our bullish bias on long-term Treasuries – a view we’ve held for over a year now – as the Fed is likely to continue downwardly revising their “dot plot” closer to subdued market expectations, at the margins. 2015 is shaping up to be the 2nd straight year in which long bonds bulls outperform their counterparts in the equity market: TLT and EDV appreciated +23.6% and +39.6%, respectively in 2014 vs. a return of +11.3% and +7.5% for the SPY and DIA, respectively. For those of you who must remain long of U.S. equities, we reiterate our preference for domestic revenue and EPS exposure in lieu of international exposure, which translates to favoring small-caps (IWM) over large-caps (SPY), as well as being long of Consumer Discretionary (XLY) and Housing (ITB) stocks.


No Growth? - FOMC Dot Plot


No Growth? - S P 500 Revenue and EPS Growth


Best of luck out there,


Darius Dale


Keith's Macro Notebook 3/30: China | USD | Oil


Hedgeye CEO Keith McCullough shares the top three things in his macro

notebook this morning.

RTA Live with Keith McCullough

Here is the replay from today's edition of RTA Live, available exclusively to Real-Time Alerts subscribers.


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