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LEISURE LETTER (04/01/2015)

TICKERS: IGT, SGMS, CCL

COMPANY NEWS  

NAGAWORLD- GGR at its Phnom Penh resort NagaWorld rose 48 % YoY in Q1 2015. Gross revenue from the VIP segment doubled, to US$65.5 million, from nearly US$32.6 million in Q1 2014. In the VIP segment, NagaWorld’s rolling chip turnover for Q1 2015 jumped 70% to nearly US$1.70 billion 

ARTICLE HERE

Takeaway: Great results from Nagaworld. Some formerly Macau VIP customers seem to be playing there.

 

IGT/GTECH - has met all conditions for merger with IGT. The combined company IGT will start trading on NYSE on April 7. Last day of trading in Borsa Italiana of GTECH shares will be on April 2.

 

Konami - expects the delisting of its ADS from NYSE to become effective April 24.

 

SGMS - announced that Santa Casa da Misericordia deLisboa ("SCML" or "the Lottery"), the operator of the Portuguese State Lottery, reported record instant game sales in 2014, up 18% YoY. The trend has continued in 2015 with instant game sales exhibiting an unprecedented year-over-year increase of more than 35% thus far.

 

Company signed a two-year contract in February 2014 to provide instant games and related services to SCML. Scientific Games became the sole supplier of the Lottery's instant games. 

 

Santa Casa da Misericordia de Lisboais currently ranked in the top four lotteries in Europefor instant game per capita sales (La Fleur's 2015 World Lottery Almanac).

 

Blackstone - will acquire three large hotels from a consortium led by Paulson & Co. for US$1.2 billion, according to a Wall Street Journal report. While the deal has not been confirmed by either party, people familiar with the matter said the hotels in the deal are the Ritz-Carlton and JW Marriott in Orlando, Florida, and the JW Marriott in Scottsdale, Arizona. The hotels combined have more than 2,500 rooms, about 472,000 square feet (43,850 square meters) of meeting space and 54 holes of golf on 800 acres (324 hectares).

ARTICLE HERE


Starwood Capital - sold the Ace Hotel in London for 150 million pounds. The sale includes the 258-bedroom hotel as well as the Miranda nightclub and the popular Hoi Polloi restaurant. It was sold by Starwood Capital Group to a company called Limulus which was advised by the Deerbrook Group. The deal comes nearly three years after Starwood bought the property out of an administration led by Ireland's National Asset Management Agency.

ARTICLE HERE

Takeaway: This luxury boutique property in hot London was sold for average ~US$860k per key.

 

CCL - Passengers have been stuck onboard P&O Oriana, as it has been unable to dock at Southampton due to strong winds.  Those due to board today have been told they can board from noon tomorrow and have been offered a 50% refund off a future cruise. The 1,000 passengers who traveled to Southampton have been put up in hotels and given dinner by P&O Cruises.

ARTICLE HERE

 

MSC Cruises - is returning to the UK next year with a short series of ex-UK sailings from Southampton. The line will base Fantasia-class ship MSC Splendida in Southampton for six sailings, having pulled out of the UK market this year.

ARTICLE HERE 

INDUSTRY NEWS

Macau GGR -  March GGR as published by DICJ totaled HKD 20.861 bn (MOP 21.487 bn), down by 39.39% YoY.  

Takeaway: As expected

 

Graftbuster - Huang Shuxian, minister of supervision and a deputy chief of the Central Commission for Discipline Inspection, said on Monday he hoped to "pragmatically cooperate with Macau's Commission Against Corruption to strengthen the tracking down of fugitives and proceeds".  The remark was made during a meeting in Beijing with the Macau commission's director, Andre Cheong Weng-chon, days after the launch of Operation Skynet, the mainland's international manhunt for fugitive corrupt officials.

ARTICLE HERE

 

New construction safety rules - Macau is drafting new construction safety rules, officials said, after several workers died this month at casino sites amid a building boom in the world's largest gambling hub. The Labour Affairs Bureau of the southern Chinese territory said the new regulations would be submitted to the government this year. They would include a revision of existing occupation and laws to "safeguard workplaces for all workers".

ARTICLE HERE

 

Ohio bill would cut promotional expenses - Republican senators on Tuesday accused casinos and “racinos” of shortchanging schools and local governments by $165 million since 2012 by deducting promotional credits from their revenue before taxes. 

 

Coley, joined by Republican Sens. Dave Burke of Marysville and Bob Peterson of Sabina, seeks to overturn a law signed by Gov. John Kasich in July 2011 that approved promotional gaming credits -- part of an agreement Kasich worked out with casino operators in which they agreed to pay the state an additional $110 million over 10 years.

 

Under that 2011 agreement, if promotional credits are made taxable, casino operators Penn National and Rock Ohio Caesars could cease making payments to the state on the $110 million.

 

“It is a big deal,” Sen. Bill Coley (R., West Chester) said. “This month, March, 2015, Ohio casinos and racinos have surpassed $500 million in promotional gaming credits. A half a billion dollars has been given out in the short time that we’ve had gaming in the state of Ohio as promotional gaming credit.”

 

Mr. Coley’s bill would limit promotional credits to $5 million per casino a year.

ARTICLE HERE

Takeaway: This is a negative for PENN if Coley gets his way. We will keep an eye on his bill. 

 

Cash handouts - Secretary for Economy and Finance, Lionel Leong acknowledged that the value of cash handouts might be “adjusted” in 2016, depending on Macau’s economic outlook and the government’s budget. He told lawmakers that, “cash handouts depend on MSAR’s financial situation,” before adding that, “we are still estimating the amount that will be given in 2016, taking into consideration our budget. There’s a possibility that the cash handout might be a smaller amount than in 2015.”

 

This year, each permanent resident will be granted a cash handout of MOP9,000 and temporary residents will receive a smaller handout of MOP5,400. 

ARTICLE HERE

 

NJ lottery - NJ Treasurer Andrew Sidamo-Eristoff says the Christie administration has lowered its revenue expectations for the state lottery in fiscal year 2015, which ends on June 30.  He did not say specifically how much the expected revenue dropped but attributed the decrease to industry-wide trends.

 

State documents show that initial revenue forecasts projected $1.037 billion in revenue for the current fiscal year, but Christie’s 2016 proposal reflected lower receipts at $955 million.

 

Sidamon-Eristoff says the lottery, which Christie privatized in 2013, is facing increasing competition from other games and that there are demographic shifts affecting customers’ behavior.
ARTICLE HERE 

Takeaway: Not surprising given the string of disappointing tax receipt #s recently from the NJ state lottery. NJ lottery is run by Northstar New Jersey (consortium with SGMS/GTECH/OMERS).

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.


RH – Growing the Greenwich Footprint

Takeaway: Proof that 22k sqft Greenwich store is too small. Will likely see fewer Legacy Store closures as RH continues category expansion.

This is the first time we've seen RH swap out a Legacy Store for a Design Gallery in a market and then supplement the new footprint with an additional concept -- in this case it's Baby & Child. Our analysis suggests that the Greenwich market could support a 65k sq. ft. store assuming 10% market share in 2018 and $1200/sq. ft. in productivity. Meaning the current 22k sq. ft. store, while in a great location, and significant ROI, could and should arguably be much bigger versus how it exists today in order to capture the market opportunity and properly display the company's expanding category portfolio.

 

Instead of swapping out the door (which has extremely favorable rent economics -- especially given the prime location) for a bigger footprint, like we saw in West Hollywood and will see in Houston, RH is adding square footage across the street. The new door at 4,800 sq. ft. is taking over vacated space by Gap Kids (the Legacy Store the company closed last year was 5,500 sq. ft.)

 

More than anything, we think this is a very bullish statement on the success of the Greenwich market. The company would not be opening a Baby & Child concept unless the Design Gallery was crushing it in year 1. Between Baby & Child, 2 new pending concepts (which could merit their own doors), and the addition of Kitchens still TBD we think we'll see a lot more of this. As in, Legacy Store closures as new Design Galleries open up will be lower than most expect.

 

Source: (http://www.greenwichtime.com/business/article/Restoration-Hardware-to-open-second-shop-on-6168593.php)


Europe, US Dollar, UST 10YR

Client Talking Points

Europe

German data remains good enough to keep the mainstream bulled up on European central planning (German PMI 52.8 MAR vs 52.4 last) and French/Greek data continues to suck enough to beget more begging for more #cowbell – 1-2 day corrections in everything European Equities and Sov Bonds, then straight back up (Denmark +31.7% year-to-date).

US Dollar

Buying the counter-TREND 2 week selloff in USD and shorting everything Commodity #Deflation getting you paid (again); that said, at $98.50 USD Index it’s signaling immediate-term TRADE overbought, so from a trading perspective we would book some gains here in, currencies, commodities, and commodity stocks.

UST 10YR

The UST 10YR remains to be the best way to be long both Global #Deflation and #GrowthSlowing – 1.92% on the UST 10YR with immediate-term support down at 1.85% and no intermediate-term support to the all-time lows.

Asset Allocation

CASH 31% US EQUITIES 14%
INTL EQUITIES 13% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.

ITB

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. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 

 

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. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

 

TLT

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. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road

TWEET OF THE DAY

You don't want to blow up your April, on the 1st day of April

@KeithMcCullough

QUOTE OF THE DAY

"If you ain't first, you're last!"

-Ricky Bobby

STAT OF THE DAY

Housing: Purchase Activity rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis.   On a quarterly basis, purchase demand in 1Q15 is up +6.4% sequentially +2.2% YoY, marking the first quarter of positive growth since 3Q13. 


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 80.33%
  • SHORT SIGNALS 78.51%

Fed Appoints McCullough Director of New ‘Division of Transparency’

This note was originally published April 01, 2015 at 08:44 in Early Look

FOR IMMEDIATE RELEASE

 

The Federal Reserve Board has announced the appointment of Keith R. McCullough as Director of the newly formed Division of Transparency, effective immediately. In addition to this newly formed role, Mr. McCullough will also serve as a special senior advisor to the Federal Open Market Committee (FOMC).

 

"Mr. McCullough is a highly regarded economist and market practitioner. His firm Hedgeye has robust expertise in macroeconomic modeling, monetary policy design, and policy communications," said Stanley Fischer, vice chairman of the U.S. Federal Reserve.  "We look forward to his expertise in a wide range of monetary policy decisions and recommendations to the FOMC's subcommittee on transparency. Hopefully he will also enable us to finally have some degree of accuracy in our economic projections.”

 

As senior special adviser to the Board, Mr. McCullough will contribute his expertise to the monetary policy decision-making process and help support related work of the Federal Open Market Committee (FOMC). In particular, McCullough will assist in the work of the subcommittee on accountability of financial projections. Mr. McCullough has been an avid Fed observer and critic for almost two decades.

 

Fed Appoints McCullough Director of New ‘Division of Transparency’ - f1

 

As a division director, Mr. McCullough will advise the Board and the FOMC on the conduct of monetary policy, including open market operations and the discount window.  In recent years, he has played a central role in critiquing the FOMC's monetary policy process.  In particular, he has wondered, perhaps too rationally, why the FOMC has maintained its zero interest rate policy (ZIRP) despite near full U.S. employment. 

 

"Keith has had a long and distinguished career in finance. And while he has often referred to me as the “Mother of All Doves,” I am grateful to have the benefit of his advice and counsel as division director,” said Federal Reserve Board Chair Janet L. Yellen. “We all look forward to continuing to work together in this important, new role."

 

Mr. McCullough founded Hedgeye Risk Management in 2007 during the throes of the financial crisis and has served as its CEO since. He is also co-chair of the NYC Bi-Policy Center, the only Washington, D.C.-based think tank actively promoting bipartisanship to address the key challenges facing the United States since 2013.

 

“The truth of the matter is that I likely would never have opted to go advise “The Bernank” had he called when he was chair. But when Chair Yellen called, I felt like I needed to go serve the best economic interests of this fine nation. It’s for my kids. And my kids’ kids. And the kids of my kids’ kids.” McCullough said.

 

Mr. McCullough does not have a PH.D in economics, has never served the Federal Reserve in any fashion, and was never a professor at any fancy University with a French sounding name.  In addition to creating the “ESPN of Finance” at Hedgeye, he has also coached his son’s Mite Hockey Team, the Mid-Fairfied Rangers, to the Connecticut state finals.

 

When reached for comment long time Fed critic Peter Schiff responded simply, “Buy Gold!”

 

For media inquiries, contact dholland@hedgeye.com


Fed Appoints McCullough Director of New ‘Division of Transparency’

FOR IMMEDIATE RELEASE

 

The Federal Reserve Board has announced the appointment of Keith R. McCullough as Director of the newly formed Division of Transparency, effective immediately. In addition to this newly formed role, Mr. McCullough will also serve as a special senior advisor to the Federal Open Market Committee (FOMC).

 

"Mr. McCullough is a highly regarded economist and market practitioner. His firm Hedgeye has robust expertise in macroeconomic modeling, monetary policy design, and policy communications," said Stanley Fischer, vice chairman of the U.S. Federal Reserve.  "We look forward to his expertise in a wide range of monetary policy decisions and recommendations to the FOMC's subcommittee on transparency. Hopefully he will also enable us to finally have some degree of accuracy in our economic projections.”

 

As senior special adviser to the Board, Mr. McCullough will contribute his expertise to the monetary policy decision-making process and help support related work of the Federal Open Market Committee (FOMC). In particular, McCullough will assist in the work of the subcommittee on accountability of financial projections. Mr. McCullough has been an avid Fed observer and critic for almost two decades.

 

As a division director, Mr. McCullough will advise the Board and the FOMC on the conduct of monetary policy, including open market operations and the discount window.  In recent years, he has played a central role in critiquing the FOMC's monetary policy process.  In particular, he has wondered, perhaps too rationally, why the FOMC has maintained its zero interest rate policy (ZIRP) despite near full U.S. employment. 

 

"Keith has had a long and distinguished career in finance. And while he has often referred to me as the “Mother of All Doves,” I am grateful to have the benefit of his advice and counsel as division director,” said Federal Reserve Board Chair Janet L. Yellen. “We all look forward to continuing to work together in this important, new role."

 

Mr. McCullough founded Hedgeye Risk Management in 2007 during the throes of the financial crisis and has served as its CEO since. He is also co-chair of the NYC Bi-Policy Center, the only Washington, D.C.-based think tank actively promoting bipartisanship to address the key challenges facing the United States since 2013.

 

“The truth of the matter is that I likely would never have opted to go advise “The Bernank” had he called when he was chair. But when Chair Yellen called, I felt like I needed to go serve the best economic interests of this fine nation. It’s for my kids. And my kids’ kids. And the kids of my kids’ kids.” McCullough said.

 

Mr. McCullough does not have a PH.D in economics, has never served the Federal Reserve in any fashion, and was never a professor at any fancy University with a French sounding game.  In addition to creating the “ESPN of Finance” at Hedgeye, he has also coached his son’s Mite Hockey Team, the Mid-Fairfied Rangers, to the Connecticut state finals.

 

When reached for comment long time Fed critic Peter Schiff responded simply, “Buy Gold!”

 

For media inquiries, contact


LV STRIP: BACC NOT PICKING UP MACAU’S SLACK

Takeaway: Takeaway: Vegas’s supposed strong recovery has been less than inspiring. Baccarat is another example

  • Slight growth in Baccarat was prevalent until last summer but growth has slowed to a crawl – the trend is now lower
  • Some analysts had expected a surge in Strip baccarat as Chinese VIPs looked outside of Macau for gambling destinations
  • With Baccarat no longer the growth driver, Strip gaming revenues could be under pressure.  Indeed, February GGR fell 4% YoY on the Strip and down 8% on a hold adjusted basis.
  • We remain skeptical of Street expectation of a V-shaped or U-shaped recovery in Las Vegas. RevPAR remains a bright spot but YoY growth in the Las Vegas hotel segment continues to underperform the national average.

 

LV STRIP: BACC NOT PICKING UP MACAU’S SLACK - bacc


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