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LEISURE LETTER (06/12/2015)



June 25: NJ Senate votes on AC PILOT tax bill


RCL - A MERS outbreak in South Korea has prompted RCL to cancel planned cruise ship stops in South Korea for Mariner of the Seas, Voyager of the Seas, and Quantum of the Seas until the health situation improves.  Royal Caribbean replaced the stops with an alternate port or a sea day.


Takeaway: More of a negative for Mariner/Voyager, neither of which has seen much pricing power in Asia. 


AHT- Ashford Trust announced a pair of acquisitions. It completed the acquisition of the 226-room Le Pavillon Hotel for total consideration of $62.5 million in cash ($277,000 per key).  Ashford Inc., will provide $4M in key money for AHT's acquisitions of the Le Pavilion.   

  • Purchase price (after adjusting for key money) equates to an estimated forward 12-month cap rate of 7.8% and an estimated forward 12-month EBITDA multiple of 11.4x

AHT also announced that it has signed a definitive agreement to acquire the 237-room W Atlanta Downtown hotel for total consideration of $56.8 million ($239,000 per key). The previous owner was Capri Capital Partners. HOT will maintain its mgmt contract.

  • Purchase price represents an estimated forward 12-month cap rate of 7.2% and an estimated forward 12-month EBITDA multiple of 11.6x



Takeaway: W Atlanta's price per key is roughly in-line with the Hyatt Atlanta Midtown property sold last July. 


PEB – Pebblebrook Hotel Trust announced that it has acquired The Tuscan Fisherman’s Wharf, a Best Western Plus Hotel (“The Tuscan”) for $122.0 million. ($552,036 per key). The property will continue to be managed by Kimpton Hotels & Restaurants.  



CCL – Announces that they are cancelling their "Cruise to Nowhere" from Norfolk, VA. “Due to recent changes in how ships are cleared into and out of the United States by U.S. officials, certain short duration cruises without a foreign port of call are subject to itinerary changes beginning in 2016,” said a spokesperson for CCL. 


The regulation also forced Norwegian to cancel three two-night cruises Breakaway, scheduled for 2016 out of New York.





Leong comments on Coloane Leong states that there is no law prohibiting casinos on the island.  Louis XIII has a casino/hotel under construction in Coloane, expected to open in 201 6. No hotelier on Coloane has ever applied for a licence to run a casino on the island, Secretary of the Economy and Finance Lionel Leong Vai Tac has said.  Leong told reporters that only gaming concessionaires – and not hotel operators – could be granted casino licences. 



Atlantic City bill -  NJ state Assembly on Thursday approved a package of five bills for the struggling seaside resort town. The most important would let its eight casinos make payments in lieu of taxes for 15 years, letting them know exactly how much they owe instead of facing huge potential increases each year.


The so-called PILOT bill would let the casinos collectively pay $150 million for the first two years, and $120 million annually for 13 years, assuming gambling revenue stays within certain ranges in the city. Calculations made in December, which the casinos say are still in effect, would grant large tax reductions to billionaire Carl Icahn and Caesars Entertainment, two of whose three Atlantic City casinos are in bankruptcy.

  • The Tropicana, which Icahn owns, and the Trump Taj Mahal, which he is soon to acquire, would pay nearly $19 million less in the first year of the plan. 
  • Caesars and Harrah's would see a nearly $20 million reduction, though Bally's would see a $2.6 million increase in payments. 
  • The Borgata would see a $2.7 million reduction.

That led lawmakers to amend the bill to provide that any casino asked to pay more under the PILOT plan than their tax bill would have been will get an equivalent credit on redevelopment taxes they are obligated to pay the state. Without such a credit, casinos including Resorts and the Golden Nugget would have faced steep increases.


The casinos would no longer be able to appeal their tax payments under the PILOT plan, eliminating a vexing financial uncertainty for Atlantic City each year.

The state Senate is due to vote on the bills on June 25.


Takeaway: Important casino tax bill in AC to keep an eye on as Borgata continues to wait on its tax refunds.


1Q 2015 Lottery - increased by 8% globally. The chart below shows Latin American Asia Pacific leading the way. For North America, the California Lottery was the strongest with 12.4% YoY increase in sales. Also performing strongly were the Minnesota State Lottery, which reported a +10.1% increase in sales, and the Connecticut Lottery Corporation, which rose 7.5% YoY. All other participating U.S. lotteries also recorded results in positive territory. This contrasted with the situation with respect to the participating Canadian lotteries, which either saw their sales decline or hold steady.

LEISURE LETTER (06/12/2015) - wla


Takeaway: North American lottery sales was solid in 1Q 2015 despite a tough macro environment. 


New Jersey – Newark: Essex County Executive Joseph DiVincenzo is pushing for a casino to help the beleaguered city. In a letter sent today to Gov. Chris Christie, state Senate President Stephen Sweeney (D-Gloucester), and state Assembly Speaker Vincent Prieto (D-Hudson), DiVincenzo said the city — the largest in the state — is well-positioned to host a north Jersey casino, given its access to highways, public transportation and Newark Liberty International Airport.



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.

Euro, Oil and Yields

Client Talking Points


Angela Merkel joins the FX War this morning, talking down the Euro as  #StrongEuro is a headwind for Spain (or something like that). The EUR/USD  is down -0.6% to $1.11 (the risk range is wide ahead of Fed meeting next week at $1.08-1.15 – that’s a sign of confusion, if nothing else).


Follow the bouncing puck – Euro Down, Dollar Up, Oil Down -1.2% - so that’s back to back up days for USD and Down Oil, but it’s all within a relatively tight risk range of $57.68-61.91 WTI (we’d buy more Oil at the low-end of the range ahead of the Fed).


Oh look, the UST 10yr Yield = 2.39% and that’s right where it started the week – nothing must have happened! German Bunds are at 0.86% this morning after ramping to 1.03% only 24 hours ago and Greek Yields just ramped +17 basis points this morning to 11.02%.


**The Macro Show - CLICK HERE to watch a replay of today's show with guest analysis from Internet and Media Sector Head Hesham Shaaban. Hesham gave his updated thoughts on Twitter (TWTR) and CEO Dick Costolo stepping down.


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


OIL: textbook fade off the top-end of @Hedgeye_Comdty $57.68-61.91 risk range this wk



If you are bored with life, if you don't get up every morning with a burning desire to do things—you don't have enough goals.

Lou Holtz


A WBUR poll indicated that 49% of voters in Massachusetts oppose bringing the Olympics to Boston in 2024 and 39% support the effort.

CHART OF THE DAY: The Biggest 1-Month Move (Ever) in Global Bond Yields

Editor's Note: This is a chart and brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe. 


CHART OF THE DAY: The Biggest 1-Month Move (Ever) in Global Bond Yields - ccc 06.12.15


...After seeing the yield quintuple in a month, what’s a German Bund Yield (pronounced Boo-nd) dropping -16% (10yr 0.86% this morning vs. 1.03% yesterday) in 24 hours amongst central planning friends?


Germany’s almighty President of the Bundesbank (as in the place where they make the Bunds), Jens Weidman, told the European press yesterday that recent volatility in the European Bond Market was not “exceptionally high.”


It’s a good thing that the biggest 1-month percentage move ever in Global Bond Yields and the worst month-to-date for sovereign bonds in over 30 years isn’t exceptional.

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Popping Headache?

“I thought so hard I got a headache.”

-J.D. Cobb


Oh, look – the US 10yr Yield just dropped back to where it started the week (2.39%). Nothing must have happened this week!


BREAKING: “Bond Selloff Could Cause Headache For Fed” -Reuters


Nah. #NoWorries

Popping Headache? - Fed cartoon 06.11.2015


Back to the Global Macro Grind


After seeing the yield quintuple in a month, what’s a German Bund Yield (pronounced Boo-nd) dropping -16% (10yr 0.86% this morning vs. 1.03% yesterday) in 24 hours amongst central planning friends?


Germany’s almighty President of the Bundesbank (as in the place where they make the Bunds), Jens Weidman, told the European press yesterday that recent volatility in the European Bond Market was not “exceptionally high.”


It’s a good thing that the biggest 1-month percentage move ever in Global Bond Yields and the worst month-to-date for sovereign bonds in over 30 years isn’t exceptional.




I had one. Now I’m fine. I’m about to get on a plane from LA to NYC. Then it’s London from there. I’m looking forward to hearing many more of the creative narratives on what, precisely, is going on out there in bond yield terms.


With all this bond market talk, I haven’t spent enough time keeping you up on Global Equity markets this week (they don’t cease to exist), here’s what I’m thinking:


  1. Japanese Stocks (Nikkei): +4.0% month-over-month and still our favorite International Equity allocation
  2. Chinese Stocks: to infinity-and-beyond (+17.4% month-over-month) even though FXI is breaking down
  3. South Korean Stocks (KOSPI): down for the 8th day in the last 10 – must be a global #growthaccelerating signal
  4. Indian Stocks (BSE Sensex): barely up on the bounce this morning – still bearish, -2.1% in the last month
  5. Mongolian Stocks (yep): +12% month-over-month; I hope you nailed that
  6. UK Stocks (FTSE): +0.3% this morning to +2.5% in the last month; Top 3 International Equity allocation
  7. German Stocks (DAX): big bounce yesterday, but still -1.1% m/m and I’m not buying this dip
  8. Greek Stocks (Athex): -2.2% this morning, -2.9% m/m, and -38.4% y/y #GongShow
  9. Polish and Russian Stocks: -6.5% and -10.5% month-over-month, respectively (I don’t like either)
  10. US Stocks (SP500): +0.17% yesterday and +0.46% in the last month – fair fight; bullish ahead of the Fed


Sorry. I had to mention the Fed and bond market again in order to say #bullish on US Stocks (SPY). It’s all one and the same call. If the Fed alleviates the headaches next week (just reiterates what they’ve been saying), you probably buy everything (on red).




Not Mongolian stocks – they’re overbought. But if the Fed knocks the US 10yr Yield back to where it was only 12 days ago (2.10%), I certainly wouldn’t want to be short bonds or any US stock that looks like a bond (REITS, Utes, etc.).


In US Equity terms, here’s what we still like the most in terms of net LONG asset allocation:


  1. US Healthcare Stocks (XLV)
  2. US Housing Stocks (ITB)
  3. Restoration Hardware (RH)


You mean you’re still not long RH? Ah, that’s because it looks “expensive”, right? Well, it’s my All-Star Partner, Brian McGough’s, birthday today and I wanted to give him a shout-out for staying with what’s been a world class research call.


*Note to the valuation experts:


  1. “Expensive” stocks with high short interest get more expensive when they deliver on the growth story
  2. “Expensive” macro exposures (like Treasuries) get more expensive when growth slows
  3. “Cheap” gets cheaper when a company misses and your boss blows it out due to his/her P&L headache


Oh, and if your stock is expensive and your CEO sucks – just fire/remove him like Twitter (TWTR) did this morning and you get that pop. You know – like when you try so hard that nothing is working.


Then you stop doing that. And things pop! My head feels better now. Enjoy your weekend.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.14-2.51%

SPX 2092-2123
Nikkei 20064-20787
VIX 12.56-15.38
USD 94.01-95.88
YEN 122.61-125.46
Oil (WTI) 57.68-61.91

Gold 1165-1198


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Popping Headache? - ccc 06.12.15

TWTR: No Easy Fix

Takeaway: The problem with TWTR is the business model and expectations. Dorsey likely can't fix the former; managing the latter won't be much easier.


  1. COSTOLO STEPS DOWN: This was more a question of when, not if, although we are surprised that it happened so quickly into the year.  The street had been calling for Costello’s head on and off since its prior blow-up on the 3Q14 release.  TWTR is now conducting a search both externally and internally for its new CEO; there is no timetable set for when it will fill the role.
  2. DORSEY DOESN’T HAVE THE ANSWER: Interim CEO/co-founder Jack Dorsey suggested that there will no change in the company’s direction/strategy; likely because there is no easy fix.  The problem with TWTR is its business model and street expectations.  The Street demands perpetual upside in both revenues and MAUs, but those two factors that have historically been working against each other (see note below for more detail).  Ultimately, that is a recipe for disappointment; we doubt Dorsey can manage that dynamic any better than Costolo has.
  3. ASSESSING THE SETUP: The switch from Costolo to Dorsey has no bearing on our thesis.  However, we have been mulling the short since the 1Q15 release; largely because TWTR has rebased expectations with both the guidance cut and cautious 2Q MAU growth comments.  However, 2016 is around the corner, and the +50% advertising revenue growth that the street is expecting will be a tall order without a fundamental shift in its monetization strategy.  In short, we see one quarter of potential upside ahead of another potential blow-up 1-2 quarters later.  


TWTR: No Easy Fix - TWTR   2Q13 Supply Shock w detail

TWTR: No Easy Fix - TWTR   Ad vs. MAU 1Q15

TWTR: No Easy Fix - TWTR   Consensus Ad 2Q15


For more detail, see note below.  Let us know if you have any questions or would like to discuss.


TWTR: Rock and a Hard Place (1Q15)

04/29/15 08:15 AM EDT

[click here]



Hesham Shaaban, CFA


We the People

This note was originally published at 8am on May 29, 2015 for Hedgeye subscribers.

“Government spending is taxation.   When you look at this, I’ve never heard of a poor person spending himself into prosperity; let alone I’ve never heard of a poor person taxing himself into prosperity.”

-Arthur Laffer


Hedgeye Early Look reader and friend Governor George Pataki officially threw his hat in the ring last night for the Republican nomination for President.   The political punditry is by and large calling him the darkest of dark horses.   And who knows, maybe they are correct – Governor Pataki has been out of public for nine years, currently is not well funded, and is centrist among Republicans.


The reality remains, though, that the Republican is currently ripe for a new face.  Someone that is above the fray and perhaps, on some level, embodies the “disinterested statesmen” that was originally envisioned by the Founders as a key characteristic for the Presidency.  The Republican race also needs some plain talk and who better to offer it than a candidate that has little to lose.


As a Canadian citizen, I can’t actually vote, so I’m no danger to any of you partisans out there, but a more centrist Republican who is trying to push the party beyond social issues and hasn’t been directly involved in the massive buildup of the federal government over the past ten years will be appealing to some.  The central tenet in Pataki’s launch video is a focus on government as the problem.


Certainly, a lot of politicians and political candidates pay lip service to reducing the size of the government, while few actually follow through.  If there were ever a time for follow through it is 2016, a year in which the federal government’s spending will be over $4.0 trillion and government debt will accumulate to $23.5 trillion.  Undoubtedly one point that all of us can agree on is that governments are the most ineffective allocators of capital.

We the People - z debt


Back to the Global Macro Grind...


Staying with the theme of the Presidential race this morning, there is one big challenge facing Pataki or any Republican – Hillary Clinton.   In the race for the Democratic nomination, she has a staggering lead of 51 points in poll aggregates over the second nearest candidate Elizabeth Warren. Meanwhile versus the large Republican field, Clinton outpolls the top contenders by between 8 and 10 points.


So, what, if anything, can stop the Clinton coronation?  Well, as we touched on it a note a few weeks ago, there are a number of legitimate headwinds to a Clinton Presidency. The top four headwinds we see are outlined below:


1. The Clinton Foundation - This risk is the most topical right now given the current scrutiny the Foundation is receiving thanks to Peter Schweitzer’s book, “Clinton Cash: The Untold Story of How and why Foreign Governments and Businesses Helped Make Bill and Hillary Rich.” It is also very likely an issue that will not go away.  On some level, whether the Clintons acted ethically as it relates to the Foundation is irrelevant because there is enough fodder that it will allow Republicans to continue to keep the heat on the Foundation.  To the extent the scrutiny accelerates, the Foundation has the potential to become Clinton’s “Swift Boat” moment.

2. Likeability (and accessibility) – Since announcing her candidacy more than 45 days ago, Hillary has limited interaction with the press.   Whether this lack of accessibility is ultimately perceived as a lack of a common touch (think Hillary going into Chipotle wearing sunglasses and not leaving a tip) remains to be seen. However, her favorability has taken a steady decline since she left office as Secretary of State in February 2013.


3. Bill’s Gaffes – While there is no question that Bill Clinton is one of the most talented politicians of his generation, there is also no question he is (and maybe increasingly so) prone to putting his foot in his mouth. In today’s hyper-plugged in digital world, where no one is safe from a rogue iPhone recording a candidate’s every word, this may pose a delicate challenge for the former commander in chief. 


4. Benghazi (and general track record) – In aggregate, Hillary Clinton’s role as Secretary of State is regarded favorably and without much controversy with one big elephant-in-the-room exception – Benghazi.  This was of course the unfortunate turn of events that led to the deaths of U.S. Ambassador J. Christopher Stevens and three other Americans when the U.S. diplomatic mission in Benghazi, Libya was attacked.


We are going to reserve analysis of the events, but believe this will become a major thorn in her side, especially as it gets into the nitty-gritty of the campaign post the nominating conventions.   The downside of having a track record is that it can and will be scrutinized.  With the eventual planned releases her emails as Secretary of State, her record will be subject to accelerating scrutiny.


Certainly, if the election were held today, it is hard to argue that Clinton would likely win in a landslide.  But whether it is the emergence of a new Republican contender or a current front runner breaking from the pack, the polls will narrow into Election Day as they always do.


For Clinton specifically, as touched upon above, her favorability ratings continue to decline.  Currently based on poll aggregates, 47.8% view her unfavorable and 45.9% view her favorably.   These are her worst readings since 2009.


Make no mistake about it: there will be a race in 2016.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.20%

SPX 2107-2130

Nikkei 20091-20688

VIX 12.76-14.42

Oil (WTI) 57.01-61.35

Gold 1180-1205 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


We the People - z 05.29.15 chart

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