prev

LEISURE LETTER (06/11/2015)

TICKERS: HOT, MGM

COMPANY NEWS  

Neptune - denied that it is laying off 300 layoffs of workers by the end of this month.  They added: “Because of the large number of employees and the high turnover rate of employees, [we have had] 100 [or] 200 employees who resign or are let go each year for different reasons in the past few years. This year so far the number of employees who resign or are laid-off is similar to the level of the past few years, contradictory to the online rumors that 300 employees will be sacked by end of this month. The relevant media reports are unfounded.”

ARTICLE HERE

Takeaway: Attrition - the only way politically to reduce headcount

 

HOT - announced plans to debut in South Australia with the signing of Aloft Adelaide in the state capital. Owned by local developer, Sturt Land Pty Ltd, a joint venture between local construction group Tagara and Melbourne-based developer Colvid, the signing of Aloft Adelaide marks the Aloft brand’s third property to enter the Australian market.

ARTICLE HERE

 

MGM – CEO of MGM China operations, Grant Bowie commented on possible merger speculation with WYNN. “This report was mere speculation and frankly we don’t comment on speculation. I don’t think it does us any good to continue these discussions.”

Takeaway:  The idea of a merger sounded far fetched but Bowie didn't deny the possibility either. 

 

Bloomberry – CEO Razon, said he would be willing to invest in a new international airport in Manila to boost tourism in the country.

ARTICLE HERE

 

INDUSTRY NEWS

New Zealand – saw 10% cruise passenger growth in 2014. Considered the third fastest growing cruise passenger market next to Australia (20.4%), and France (13.6%).

ARTICLE HERE 

MACRO

China Industrial Output (May) - actual +6.1%; consensus +6.0%

China Retail Sales (May) – actual +10.1%; consensus +10.2%  

 

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.


RTA Live: June 11, 2015

Here is the replay of today's edition of RTA Live.

 


Bunds, USD and Japan

Client Talking Points

BUNDS

But today isn’t about the Fed; it’s about this epic Global Yield move that continues to be perpetuated by daily ramps in the 10YR German Bund Yield (up +4 basis points today to 1.02%). This even has JGB 10YR Yield up +4 basis points on the day to 0.54% (but you won’t see a Japanese “rate hike” narrative like you’re seeing as consensus chases momentum in the U.S. on that).

USD

There is nothing like a few solid down days for the U.S. Dollar ahead of the Fed meeting to get Oil to re-test the top-end of our current 58.81-61.98 risk range for WTI… then the USD bounces, and Oil pulls back a full 1% - this component of the correlation trade remains #on.

JAPAN

Instead of burying our heads in the bond yield sand, we did make the call to re-short the Yen (vs USD) yesterday inasmuch as we reiterated the call to buy Japanese equities at the low-end of our risk range. The Nikkei was up +1.5% overnight vs. something like India which was down -1.9%. There are plenty of long/short ideas out there in Global Macro to stay with.

 

 

**The Macro Show - CLICK HERE to watch a replay of today's show with guest analysis from Gaming, Lodging, and Leisure Sector Head Todd Jordan. Todd gave an update to his Macau outlook and discussed the risk profile given the current supply and demand imbalance.

 

Asset Allocation

CASH 40% US EQUITIES 6%
INTL EQUITIES 14% COMMODITIES 10%
FIXED INCOME 28% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
PENN

Penn National Gaming is a true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow.  We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility.  PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016. PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.

ITB

The takeaway on Purchase Activity was mixed as demand declined -3.0% sequentially but accelerated from +13.1% to +13.9% on a year-over-year basis.  More broadly, and inclusive of the latest week, purchase demand in 2Q continues to reflect both sequential and year-over-year improvement with demand growth for the quarter currently tracking +13.6% QoQ and +12.8% YoY. No major callouts in the latest week as the larger trend towards ongoing improvement in purchase activity in 2Q remains intact. 

CLICK HERE to watch Housing Sector Head Josh Steiner gives a brief update on our call on ITB.

TLT

Considering we are already well passed an above average length expansion, and moving into the second half of 2015 growth and inflation comps (i.e. the base effects) become very difficult, growth is likely to continue to slow. We put the likelihood of a rate hike in 2015 as highly unlikely and continue to expect rates to move to make a series of lower-highs through the balance the year (bullish for EDV, TLT, and VNQ. When forward looking growth expectations are downwardly revised and the Fed kicks the can on rate hike expectations, rates and the dollar move lower. Gold has historically performed well in an environment of falling rates and a declining U.S. dollar and we don’t expect anything different this time around. Supporting our view, both gold (GLD) and treasuries (TLT, EDV) remain BULLISH on an intermediate-term TREND duration (3-months or more).   

Three for the Road

TWEET OF THE DAY

World Bank cuts US GDP from 3.2% to 2.7% (and they are still too high) @HedgeyeDDale

@KeithMcCullough

QUOTE OF THE DAY

Leadership is the capacity to translate vision into reality.

Warren Bennis

STAT OF THE DAY

The Royal Institution of Chartered Surveyors reported on Thursday that the stock of homes per surveyor has fallen 12% this year to 52 properties, the lowest since records began in 1978.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

KKD: PUMPS SOME JELLY INTO THE MIDDLE

Takeaway: This 1Q FY16 story line was one of improved margins and increased disclosure.

Adding KKD back to the LONG bench of the Hedgeye Restaurant Best Ideas List!

 

Last night, KKD reported Q1 FY16 earnings, with top line revenue of $132.5mm vs consensus of $135.3mm.  The slight miss on the revenues was over shadowed by a bottom line beat, Q1 adjusted EPS was $0.24 vs consensus $0.22. The market reacted positively to the results, in pre-market trading this morning the stock is up about 6.9%.

 

IMPROVED MARGINS - This 1Q FY16 story line was one of improved margins and increased disclosure. Management introduced a couple new metrics to evaluate performance, one being ‘Company Stores Contribution’ which is equal to Company Stores revenues less COGS; labor and benefit costs; vehicle costs; occupancy and other store related costs and excludes D&A expenses; marketing expenses and segment G&A expenses. This is a non-GAAP measure but seems to be a true look at the base business performance without all the noise, this metric was up 270 basis points YoY to 18.5%. Results were driven by positive SSS growth and more strategic use of promotional incentives.

 

STRONG SAME-STORE SALES - System-wide same-store sales (SSS) increased 5.2%, including 4.3% comp at domestic company stores and 5.8% comp at domestic franchised locations. International which is entirely franchised had a disappointing quarter, with SSS down 1.7% in constant dollars but it is trending in the right direction. The comp was driven by average check which accounted for 4%, of which most was attributed to mix due to significantly less discounting, traffic was about flat.

 

KKD: PUMPS SOME JELLY INTO THE MIDDLE - KKD Chart 1 

KKD: PUMPS SOME JELLY INTO THE MIDDLE - KKD Chart 2 

KKD: PUMPS SOME JELLY INTO THE MIDDLE - KKD Chart 3 

 

UNIT GROWTH – The bull case for KKD is centered around the significant global unit growth opportunity for the company.  The biggest driver of revenue in 1Q FY16 was the significant increase in systemwide store counts, which speaks to management’s aggressive expansion strategy to spur growth in the business. Systemwide store count rose 17.3% in the quarter eclipsing the 1,000 store mark finishing the quarter with 1,003 Company and franchise stores worldwide.

 

KKD: PUMPS SOME JELLY INTO THE MIDDLE - KKD Chart 4 

 

Management slightly adjusted the lower end of full year 2016 EPS guidance, bringing it up a penny to $0.80 to $0.85. This is mainly attributed to share buy backs as they have not adjusted the net income projections.  Additionally, management indicated during the call that they will “continue to opportunistically repurchase stock this year.”

 

Summarized outlook for the remainder of FY16:

  • 10-12 net new Company shops
  • 15-20 net new domestic franchise shops
  • 95-110 net new international franchise shops
  • Capital expenditures of between $35 million and $45 million including ongoing investments in technology
  • Continued growth in domestic SSS
  • A reduction in agricultural commodity and fuel costs compared to fiscal 2015
  • Negative effects of a stronger U.S. dollar

 

Management succeeded on many fronts this quarter taking advantage of key holidays such as Valentine’s Day, Super Hero Day and National Donut Day. Furthermore management is dedicated to expand beverages success launching new frozen coffee beverages in three flavors, mocha, vanilla and caramel. In terms of expansion they announced three development agreements in Cambodia, Guatemala and South Africa and opened stores in six new countries.

 

We believe in this growth story especially as international SSS trend towards positive territory. Management has admitted to mistakes in the domestic real estate market and is using these learnings for future expansion.  We are confident in the plan and believe in the strength of the brand, we will continue to watch this one and look for an opportunity to get more aggressive on the name.

 

KKD: PUMPS SOME JELLY INTO THE MIDDLE - KKD Chart 5


CHART OF THE DAY: An Unsustainable (And Dangerous) Decoupling

Editor's Note: Below is a chart and excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here if you're ready to subscribe and want to stay a step or two ahead of consensus.

 

Click to enlarge

CHART OF THE DAY: An Unsustainable (And Dangerous) Decoupling - z Chart of the Day

 

Probably the sharpest bond guy I met with yesterday (incidentally, he carries one of the biggest bats in the bond buying game) A) agreed with me on the Rate Mistake call and B) took the reason for a potential Fed mistake one step further:

 

“My main concern isn’t that you’re wrong on the economy  - it’s that you’re right (it’s #LateCycle slowing) and she (Yellen) takes this Global Bond Yield move as a signal that the coast is clear to get one-and-done (rate hike) on the tape.”

 


Rate Hike Apologists

“It is dangerous for a bride to be apologetic about her husband.”

-Wallace Stegner

 

There are a lot of ways I can go with that quote this morning, but I’ll keep it above the belt. I read it as I was flying to LA from San Francisco last night. And I couldn’t stop thinking about Janet & Ben.

 

While Yellen isn’t married to Bernanke, she is wed to the policy expectations framework he created. While anything is possible when it comes to un-elected decision making on interest rates, I highly doubt she raises rates for the sake of the apologists.

 

Apologists? Yes. As in the every-other-meeting I’ve been in this week where a sophisticated Institutional Investor asks me “isn’t it just time she raises rates?” I promptly say no. Raising rates into a slowdown could easily perpetuate the next US recession.

Rate Hike Apologists - Yellen cartoon 09.17.2014NEW

 

Back to the Global Macro Grind

 

Probably the sharpest bond guy I met with yesterday (incidentally, he carries one of the biggest bats in the bond buying game) A) agreed with me on the Rate Mistake call and B) took the reason for a potential Fed mistake one step further:

 

“My main concern isn’t that you’re wrong on the economy  - it’s that you’re right (it’s #LateCycle slowing) and she (Yellen) takes this Global Bond Yield move as a signal that the coast is clear to get one-and-done (rate hike) on the tape.”

 

#Agreed

 

This is where the political and market pressures on this un-elected institution (The Fed) meets its maker – the data. I actually think Janet Yellen is much more “data dependent” than The Bernank ever was. She doesn’t need to apologize for that.

 

Neither do I need to apologize for all of us hanging on any tweet that leaks when the Fed is going to move. This is the centrally planned macro market America asked for. It’s our job to attempt to risk manage it.

 

So let’s give that a try and outline 3 baseline scenarios ahead of the Fed meeting next week:

 

  1. Yellen signals that after having missed their window to hike in 2013, “it’s just time” to raise
  2. Yellen signals that since the US economic data continues to slow, there’s no rate hike on the table until 2016
  3. Yellen signals that she remains “data dependent” (i.e. repeats what she said at the March 18th meeting)

 

While I believe scenario #3 is the most probable, Consensus Fear is that Scenario #1 is more probable than it was 10 days ago when the 10yr US Treasury Yield was 2.10%.

 

And, yes, since it’s all about the rate-of-change in probabilities, the proclivity for a bureaucrat to chase last price (2.49% on the US Treasury Yield) is rising right now, not falling.

 

What if Yellen opts for the rate hike? I think the Dollar rips and stocks, bonds, and commodities get slammed. But having watched all of these macro markets move for the last 3 weeks (all down) prior to yesterday’s bounce, you already know that.

 

Then what?

 

She’ll have to cut! Yep, raise and cut. Huh? Correct – you can’t just chase bond yield charts and their correlated moving monkey averages and dismiss what I started this rant with this morning – the policy expectations framework that Janet & Ben created.

 

To review the Fed’s “data dependent” framework in its simplest of terms:

 

  1. As the data accelerates, expectations for higher interest rates do (see 2013 for details)
  2. As the data slows, expectations for lower interest rates do (see Q4 2014 to Q1 2015)

 

This is the bed that Bernanke built. And from what I can see, Janet isn’t apologizing for it. As a result, until she says otherwise, my expectation is that she is going to sleep in that bed, waking up every morning to the rate-of-change in the data.

 

In other news, the World Bank is the latest central planning outfit to cut both its US and Global Growth Estimates for 2015. They, of course, just pushed out the estimates for 2016 – which means they’ll inevitably have to cut those (again) too.

 

And in terms of non-rate-spike related ideas, I signaled to short the Yen yesterday and buy more of that Weimar Nikkei. The Japanese know very well what Slower-For-Longer looks like – they won’t divorce themselves from that rate policy anytime soon.

 

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

 

UST 10yr Yield 2.09-2.55% (bearish)

SPX 2075-2125 (neutral)
RUT 1 (neutral)
Nikkei 20049-20713 (bullish)
VIX 13.02-15.42 (bullish)
USD 94.06-95.84 (neutral)
EUR/USD 1.09-1.14 (bearish)
YEN 122.49-125.46 (bearish)
Oil (WTI) 58.81-61.98 (bullish)

Nat Gas 2.56-2.92 (neutral)

Gold 1168-1198 (bullish)
Copper 2.67-2.77 (bearish)

 

Best of luck out there today,

KM

 

Click to enlarge

Rate Hike Apologists - z Chart of the Day


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next