LEISURE LETTER (05/27/2015)



  • May 28: MGM Annual General Meeting: Proxy "Fight"
  • June 4: CCL special press announcement in NYC


SGMS - The Company's Bally, WMS, and Shuffle Master-branded games will account for 44% floor share of new gaming devices, and Plainridge will be the first casino in the country to implement a Bally play-management system for responsible gaming, which is a voluntary option for customers and is required by the Massachusetts Gaming Commission. 

Takeaway: Plainridge will open with a mix of new and old games - we believe the ratio is close to 60/40. Thus, we think SGMS's floor share is ~25% of total games or 300-350 units.

NCLH - has ended a controversial ban on passengers taking food out of its ships' buffets and other eateries to consume in their cabins. Norwegian president and COO Andy Stuart tells USA TODAY the company heard an earful from passengers who were upset after the policy went into effect several weeks ago.


Takeaway: NCL better be careful with these new onboard changes. Consumers are not stupid.


AYA  - Amaya approved to list on Nasdaq Global Select Market under symbol "AYA", commencing on June 8th.


MSC - MSC Cruises is launching its first TV advertising in the U.S. today. A commercial called “In the Summertime” will air on a variety of lifestyle and news cable channels. ”As we plan for the Divina to sail year-round from Miami starting in November 2015 and then our next-generation new-build, the MSC Seaside, to come to Miami in 2017, you’ll see a significant increase in MSC’s marketing efforts, which we expect will generate even more excitement from travel agents and consumers for our ships.” commented said Bonnie Levengood, senior VP of marketing.


Takeaway: Despite low support, MSC is not devoting less resources to the Caribbean market. 


Francis Lui commentary - “I will never say there are too many tables,” said Francis Lui Yiu Tung, hastily adding in a reference to the Macau government – which decides these things against the backdrop of a market wide gaming table cap – “I think 150 is very acceptable (for Galaxy Macau)”.


Francis Lui did however indicate a difference of opinion between some Macau officials and the city’s six casino operators on the topic of a proposed total ban on casino smoking likely to happen next year. As presently envisaged, it would include abolition of enclosed and specially ventilated smoking lounges currently to be found on mass market floors.


The executive however warned that tourism was “very important”, and preventing some patrons from smoking meant “there will be huge losses”. “We need to listen more,” stated Francis Lui. He added there were “many options” short of a complete ban. Francis Lui added that the six local operators were “working together” to propose alternatives to a complete ban, although he didn’t specify what they were.



China trading accounts - New trading accounts opened for Shanghai and Shenzhen A-share stock markets hit 2,621,395 last week, up 10.1% from a week earlier, and the number of actively traded accounts rose 10%, data from China Securities Depository and Clearing Corporation Limited showed.


Takeaway:  New Chinese stock account openings continue to rise and we've proven statistically that it investing in the stock market and gambling in Macau can be substitutes for each other. #headwind


Taiwan - Chinese mainland authorities have ruled out the possibility of its citizens being allowed to gamble in Taiwan, as casinos are mooted on one of a number of Taiwanese islands which have recently been made more accessible to mainland tourists.


Mainland regulations and cross-Strait agreements between the mainland and Taiwan are consistent in prohibiting mainland tourists from gambling in Taiwan, said Fan Liqing, spokesperson with the State Council Taiwan Affairs Office, at a regular press conference on Wednesday.


Gambling is banned on the mainland and on the island of Taiwan, though the Taiwanese island of Matsu has approved construction of casinos.


Meanwhile, the president of Taiwan’s legislature, Wang Jin-pyng, has pledged to move forward with plans to allow a casino to open in the Kinmen Islands, reported the government-run Radio Taiwan International. Wang however said that the decision on whether to build casinos on Kinmen would be up to investors. 



Takeaway: Taiwan would become an afterthought if Mainland Chinese can't gamble there.


Scam - A Singaporean has been charged in the Philippines after he allegedly tried to cheat a casino of US$30 million (S$40.3 million) in gambling chips using a fake telegraphic transfer. Dominic Sim is believed to have got $8 million worth of gambling chips from Solaire Resort and Casino in Manila in February last year - $3 million of which the casino has since managed to recover.


A Solaire Resort and Casino representative told The Straits Times yesterday that Sim was a junket operator who first partnered the casino in 2013. -



US$32 billion mega-theme park for Zhuhai - A mega-theme park is reportedly to be established in neigboring Zhuhai. The 200 billion yuan (US$32 billion) project is to be jointly funded by U.S. entertainment giants Time Warner and DreamWorks Studios, according to Mainland Chinese media outlets China Business News and China Real Estate Business newspaper.

Citing a source close to the Guangdong Provincial Development and Reform Commission, Chinese-language news outlet China Business News reported that the first phase of the project, which is set to be located in Hezhoubei in the Doumen district of Zhuhai, involves an investment of 80 billion yuan, and has already been approved by authorities.



Q1 2015 Macau retail sales and Q2 outlook - The value of retail sales dropped by 11% YoY in 1Q 2015, according to data released by the Statistics and Census Service (DSEC). Sales of Watches, Clocks & Jewelry was hit particularly hard (-31% YoY). 


With regard to business outlook for 2Q 2015, about 18% of retailers anticipate that sales volume will increase from the 1Q, 49% expect sales volume to remain stable, while 33% foresee a decrease. Concurrently, about 77% predict stable retail prices, 15% predict a decrease, while 8% expect an increase in retail prices.


Takeaway: The majority of retailers foresee 2Q to be unchanged QoQ.


Macau unemployment - unemployment rate (1.7%) and the underemployment rate (0.3%) for February-April 2015 remained at record low.  


Hedgeye Macro Team remains negative on 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.

ICI Fund Flow Survey | Risk Aversion in Equities

Takeaway: ETFs partially recovered last week's lost ground but active equity trends continue to accelerate to the downside.

This note was originally published May 21, 2015 at 09:14 in Financials. For more information on our products and services click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

ETFs recovered some lost ground from last week with equity ETFs taking in +$7.3 billion and fixed Income ETFs raising a fresh +$2.1 billion (versus a -$9.6 billion and a -$2.2 billion drawdown respectively last week). Year-to-date tallies however show bifurcated demand for passives with average weekly subscriptions in equity ETFs down 50% from 2014 versus trends in fixed income ETFs which have improved by nearly 25% year-over-year. Active equity mutual fund trends are painfully consistent with a continual bleed in domestic funds versus international equity funds which have constant fund raising. Domestic funds gave up another -$5.1 billion in redemptions, marking the 11th straight week of negative flows. Meanwhile, international mutual funds took in +$2.8 billion in the most recent 5 day period for their 19th consecutive week of subscriptions. Domestic stock fund percentages are highest at T. Rowe Price (TROW) and Janus Capital (JNS) which are exposed to this domestic category weakness versus stronger International exposures at Franklin Resources (BEN) and Affiliated Managers Group (AMG).


ICI Fund Flow Survey | Risk Aversion in Equities - z cast555


In the most recent 5-day period ending May 13th, total equity mutual funds put up net outflows of -$2.8 billion, trailing the year-to-date weekly average inflow of +$805 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$2.3 billion and domestic stock fund withdrawals of -$5.1 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.


Fixed income mutual funds put up net inflows of +$2.2 billion, trailing the year-to-date weekly average inflow of +$2.3 billion but outpacing the 2014 average inflow of +$929 million. The inflow was composed of tax-free or municipal bond funds withdrawals of -$169 million and taxable bond funds contributions of +$2.3 billion.


Equity ETFs had net subscriptions of +$7.3 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$2.1 billion, outpacing the year-to-date weekly average inflow of +$1.3 billion and the 2014 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | Risk Aversion in Equities - ICI2


ICI Fund Flow Survey | Risk Aversion in Equities - ICI3


ICI Fund Flow Survey | Risk Aversion in Equities - ICI4


ICI Fund Flow Survey | Risk Aversion in Equities - ICI5


ICI Fund Flow Survey | Risk Aversion in Equities - ICI6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Risk Aversion in Equities - ICI7


ICI Fund Flow Survey | Risk Aversion in Equities - ICI8


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew another -$405 million or -7% from the long treasury TLT ETF. Meanwhile, the healthcare XLV took in +$501 million or +4% in subscriptions.


ICI Fund Flow Survey | Risk Aversion in Equities - ICI9



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$191 million spread for the week (+$4.5 billion of total equity inflow net of the +$4.3 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.2 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$14.2 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Risk Aversion in Equities - ICI10


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Risk Aversion in Equities - ICI11 



Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA







The Macro Show Replay | May 27, 2015

USD, Oil and UST 10YR

Client Talking Points


A big 6-day move gave chart-chasers another round of whiplash, and now the bounce (in Euros +0.4%) vs USD. We think another round of Down Dollar can continue into this bomb of a GDP report on Friday (which the government is working on re-calibrating the calculation!).


WTI oil was up +1.4% on the USD arresting its ascent – get the Dollar right and you’ll get most things Commodities right. The CRB Index tested the low-end of our 221-227 risk range yesterday and bounced too. WTI oil has immediate-term upside to $61.34. 


We’re not sure how many more times perma Bond Bears can ring the ‘end of the world’ sirens, but that was a stiff 20 basis points drop from yet another lower-high for the 10YR Yield in early May – post yesterday’s -2.3% year-over-year Durable Good print,  we’re staying with the #LateCycle slowing call.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.


Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.
  • Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

Three for the Road


Finland's unemployment rate rises to 9.6% from 9.4%



Today is only one day in all the days that will ever be. But what will happen in all the other days that ever come can depend on what you do today.

Ernest Hemingway 


According to according to WPP and Millward Brown's annual "Brand Z" rankings Marlboro is the world’s 10th most valuable brand, commanding 43.8% of the U.S. cigarette market.

CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds)

Editor's Note: Below is an excerpt and chart from today's Morning Newsletter by Hedgeye CEO Keith McCullough. Click here to subscribe. 


CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds) - z blurb


CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds) - z 05.27.15 chart

Prepare To Win

“Everyone wants to win, but not everyone is willing to prepare to win.”

-Bobby Knight                       


While Knight had his issues (don’t we all?), he didn’t have as many as most do in implementing a winning #process. At Indiana, Bobby Knight won 902 NCAA games, 11 Big Ten Championships, and 2 National Championships.


The New York Rangers have that same quote on the wall of their dressing room at their training facility in Tarrytown, NY. After routing Tampa Bay last night, the Rangers won their 9th out of their last 10 games when facing Stanley Cup elimination.


Preparing to win starts with reducing mistakes. If you don’t make a habit of making big ones, you’ll take up the probability of your success. Whether you’re on the court, the ice, or in the market – winning happens when preparation meets opportunity.


Prepare To Win - z r


Back to the Global Macro Grind


Were you prepared for US #GrowthSlowing? How about another sharp reversal (to the downside) in rates? Yesterday’s US Durable Goods report slowed to -2.3% year-over-year. Bond Yields fell, hard. At 2.14% the 10yr US Treasury Yield is down YTD.


Getting up early and grinding through the #process isn’t a given but, for me at least, that’s the easy part. The hardest part is contextualizing the short-term within longer-term durations. That’s where my team and I spend the most time preparing.


While that ramp to 2.36% in the UST 10yr Bond Yield got my attention, it also prompted me to take a step back and remind myself of our most differentiated research views. To remind Longer-term Risk Managers on those, they are as follows:


  1. #DemographicYields – with the USA, Europe, Japan, and China all seeing their core consumption cohorts ((35-54 year-old populations decline on an annual basis - see Chart of The Day for the USA one – yes, it’s secular)
  2. #LateCycle – not to be mistaken with something early-to-mid cycle like #Housing, classic late cycle sectors of the US economy are in month 73 of an expansion but now slowing in rate of change terms (wages, labor, capex, earnings)
  3. Long-term Global Growth Expectations have been, and remain, too high – so central planners around the world are going to have to react to #GrowthSlowing with more cowbell which will, in due course, perpetuate volatility


That last part (volatility) is what crushes the un-prepared. As in the permas – the complacent. Those who bought both the 2000 and 2007 highs in the US Equity market thinking there was a “new normal” in volatility – or something like that.


It’s The Cycle stupid.


And remember, stupid is as stupid does (I am a knucklehead hockey player don’t forget) when it comes to believing that the Fed, ECB, BOJ, PBOC, etc. can “smooth” both cycles and the market volatilities they breed.


But, but, “Keith, housing is strengthening.” #Agreed. So why don’t you strap on your active manager pants and buy early-to-mid cycle recovery exposure to US #HousingAccelerating (our Q1 2015 Macro Theme) instead of freaking out when rates rise?


Of course consensus doesn’t want to buy Long-Bonds or Housing or REITS A) after it missed them into their 2015 highs and B) when everyone and their Bond Bear brother is still underwater betting on “rate liftoff.”


So don’t be consensus.


Do you think that Ranger Coach, Alain Vigneault, was consensus when he took former NHL MVP, Martin St. Louis, off the Rangers 1st line in an elimination game last night and replaced him with a rookie?


In my proprietary Money Puck model (I.e. in rate of change terms) J.T. Miller has been the best Ranger (relative to ice-time) in the playoffs. He had his opportunity to play on the big line last night and had 4 points. Huge game! #Timestamped


Back to the Fed, rates, and Housing… do you really think that Coach Yellen is going to thwart the only major component of the US economy that has bullish rate-of-change momentum with a pre-emptive rate hike?




Even the Fed isn’t that pro-cyclical when it comes to their job protection. I actually think they are going to celebrate the success of Devaluing The Dollar and keeping rates low (forever?) because, alongside the stock market, that’s all they have.


Back to beating the US stock market in 2015, if you really are paid to win (both relative and absolute) in this game I think you’ll continue to avoid making big mistakes by being either underweight or net short:


  1. The Financials (XLF) which are still -0.6% YTD
  2. Industrials (XLI) which are now chasing them as relative losers, -0.5% YTD


If you’re long both of those, you’re A) losing and B) betting on:


A)     US and Global Growth Accelerating (at the end of a cycle)

B)      The Fed raising rates in September


You don’t have to “bet” on random mean reversions like those if you have a repeatable #process that probability-weighs the accelerations and decelerations in both growth and inflation, across durations.


Everyone in this game wants to make money, but not everyone can win when consensus doesn’t.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.21%

SPX 2098-2121
VIX 12.95-14.37
EUR/USD 1.08-1.15
Oil (WTI) 57.36-61.34

Gold 1185-1212


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prepare To Win - z 05.27.15 chart

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