LEISURE LETTER (06/15/2015)



CCL- Announced it has signed a multi-billion dollar contract to build four next-generation cruise ships (total capacity of 6,600 guests, feature more than 5,000 lower berths, exceed 180,000 gross tons). The contract with Meyer Werft is part of larger previously announced strategic memo of understanding with leading shipbuilders Meyer Werft and Fincantieri S.p.A for nine new ship orders between 2019 and 2022.  The ships will be the first in the cruise industry to be powered at sea by Liquefied Natural Gas (LNG).

  • Two of the ships will be manufactured for AIDA Cruises at Meyer Werft's shipyard in Papenburg, Germany.
  • CCL CEO Arnold Donald said the contract is consistent with the company's measured capacity growth strategy to replace ships with less efficient capacity with newer, larger and more fuel efficient vessels over time.

Takeaway: These ships are enormous - CCL taking a page out of RCL's playbook on ship size. Let's hope there is enough demand in Europe by the time these ships are done. 


RCL- Royal Caribbean to begin 5-day WOW Sale with up to $200 onboard credit & 50% reduced deposit.  The WOW sale is valid on all sailings departing on or after July 13, 2015, excluding China departures.

  • 5 nights or less
    • $50 onboard credit (per stateroom) & 50% reduced deposit
  • 6-9 nights
    • $100 onboard credit (per stateroom) & 50% reduced deposit
  • 10 nights or longer
    • $200 onboard credit (per stateroom) & 50% reduced deposit



NCLH – Four extra amenities on 3-to-16-night voyages can be booked through July 31. Depending on the stateroom category, guests can select one to four extra perks: a free Ultimate Beverage Package, a free Ultimate Dining Package, $75 per stateroom shore excursion credit for each port, or a 250-minute WiFi package. These offers are in addition to Friends & Family Sail Free, in which the third through eighth guest in each stateroom sails at no cost. 




Paul Gaguin- Paul Gaguin Cruises has sold one of its two ships,Tere Moana, after less than three years in its fleet. The 88-passenger vessel, formerly Ponant's Le Levant, joined the Tahiti-based cruise in December 2012 after a renovation. According to a report by Seatrade, the ship was acquired by Boston-based Grand Circle Travel. 




MGM -  MGM chief Murren sees no new hotel-casinos on the strip for now. “It’s not my expectation during my career here that we will build another casino resort in Las Vegas,” said Murren. 





Industry News


Indiana - A second year of failing to meet target revenue for the state spurred the Hoosier Lottery Commission on Friday to restructure its contract with GTECH Indiana and substantially reduce the goals the company originally promised to meet in the 2012 bidding process.

  • The private vendor also agreed to lower its annual management fee and give the state a one-time lump-sum payment of $18.25 million.

  • GTECH's new minimum goal for fiscal year 2016 is $270 million, with an extra incentive goal of $290 million. By comparison, under the original agreement, the goal for fiscal year 2015 was $320 million and fiscal year 2016 was $365 million.

  • Last year about $251 million in lottery revenue was sent to state government. This year the number is expected to drop to $243 million. And that is after GTECH pays a $16 million shortfall payment for not meeting goals. 


 Takeaway: Like Illinois, Indiana has also underperformed in lottery sales. A restructuring agreement with GTECH was expected.


Oregon - Over the past year, the state has been replacing its old video lottery terminals with new state-of-the-art machines.  Since the new machines began going in, lottery revenues climbed 10%.  The plan is to replace all 12,000 old terminals by the end of next year.

LEISURE LETTER (06/15/2015) - oregon lottery sales



Takeaway: Oregon VLT phase 2 could be already under way. Good news for the suppliers.


Missouri - The state lottery reported that proceeds increased over the previous fiscal year. Today’s final transfer of $25,258,803 brings FY15 proceeds to $270,701,018, the third highest ever. 




Maryland - Maryland's five casinos have asked the state to let them reduce required payouts on slot machines — a move that could shift tens of millions of dollars in winnings from customers to the casinos, state records show.  Under the proposal, the state would relax a requirement that each casino must pay out an average of 90% to 95% of the money bet at its machines over the course of a year.  The casinos want to lower the minimum payout to 85%. 



Atlantic City SS Revs: +4.35% YoY


Saipan - Imperial Pacific International Holdings Ltd, a company that has pledged to spend as much as US$7 billion on a casino resort on the Pacific island of Saipan (pictured), said in a Friday filing that it would launch and operate a “temporary casino” there in the third quarter.





China - Stock market gains in China has created an extra one million millionaires, according to the Global Wealth Report. 




Singapore - Unemployment rate falls to 1.8% in Q1 from 1.9% in Q4 2014. 


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.

May Restaurant Sales Not Tracking With Improved Employment Trends

Takeaway: Same-restaurant sales retracted to +1.1% and same-restaurant traffic decreased -2.3% both down 80 basis points sequentially

Traditionally, strong employment trends would suggest a healthy sales environment for restaurant operators.  There continues to be a clear divergence between improvement in the employment data and same-store sales and traffic trends for the industry.    


Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of May last week that showed a slight deceleration versus an improved April. Same-restaurant sales retracted to +1.1% and same-restaurant traffic decreased -2.3% both down 80 basis points sequentially, and down 60 bps each on a 2-year basis.


May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 1 

May Restaurant Sales Not Tracking With Improved Employment Trends - Chart 2 


It appears that restaurants are continuing to raise prices despite declining commodity prices. While this is a short term benefit to margins, long term it is testing the elasticity of their customers.  As you can see from the chart below, there is a clear divergence between the operators taking price and a decline in traffic.

May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 3 


Knapp May Sales Trends

Knapp reported that comparable restaurant sales in May 2015 for 5 weeks were +0.9% for same-store sales and -2.0% for guest counts.  This represents a -10 and -40 basis point sequential slowdown respectively for the month.  On a 2-year basis, sales slowed to +0.1% and traffic down -2.0%. 


Strong Employment Data in All Age Groups

All age groups had positive employment growth during the month, highlighted by the 25-34 YOA group up 3.42%. As predicted last month, the sequential improvement seen in April in the 20-24 YOA group resulted in an impressive move to positive territory in May, up +0.75% versus last month down -0.22%. The older age groups 45-54 and 55-64 saw sequential deceleration of -8.9 and -90.3 bps respectively but still remain strong. These are very encouraging numbers for the restaurant industry, and we hope to see this trend continue through the summer.


May Employment Growth Data:

  • 20-24 YOA +0.75% YoY; +96.1 bps sequentially
  • 25-34 YOA +3.42% YoY; +24.9 bps sequentially
  • 35-44 YOA +0.77% YoY; +25.4 bps sequentially
  • 45-54 YOA +0.27% YoY; -8.9 bps sequentially
  • 55-64 YOA +2.61% YoY; -90.3 bps sequentially


May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 4 


Takeaway: Bad number off of easy comp


We continue to like the Macau stocks – on the short side. After some signs of stability recently, the month of May looks more like an anomaly and not the trend. When the month ends, June should prove trendy, that is, more consistent with Macau’s 15 month long sequential slide than May’s respite. We’re now predicting a YoY decline of 33-36%, down 3% from our forecast last week. This past week was supposed to be an easy comp.


More important than just the weekly slide, the bigger concern for us is the degradation in the high margin base mass segment.  The disparity from Street expectations may be wider and worse in the base mass segment than any other which should have an outsized impact on estimates going forward. Indeed, we remain well below Street EBITDA estimates for 2015 and especially 2016 for all of the Macau operators, particularly for the base mass leader LVS.


Please see our detailed note:

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CHART OF THE DAY: Classic Wall Street Back-End Loading

Editor's Note: This is a chart and excerpt from today's morning note written by Hedgeye CEO Keith McCullough. Click here to learn more and how you can become a subscriber.


...As you can see in the Chart of the Day, after the Old Wall and its media got blindsided by the Q1 earnings season (smoked in January) it proceeded to cut earnings estimates for the 1st half of 2015. In the 2nd half (and 2016) it’s right back to rainbows and puppy dogs.


CHART OF THE DAY: Classic Wall Street Back-End Loading - Chart of the Day

Macro's Visceral Edge

“Power’s flow and ebb can have a visceral edge.”

-Moises Naim


Macro markets tend to make you feel something. The people who are at wit’s end trying to bend and smooth economic gravity have feelings too. This weekend I found the perfect book for some of their central-planning-power lost. Ironically, it’s called The End of Power.


Now that the world has seen almost 600 rate cuts (since Lehman collapsed) and we’re in the midst of a #LateCycle slowdown, is this the beginning of that end? Or is it just my cyclical confirmation bias that Moises Naim tapped into?


“Long established, big players are increasingly being challenged by newer and smaller ones… what they are fighting so desperately to get and keep – is slipping away. Power is decaying.” –Naim (pg 1)


Macro's Visceral Edge - campfire cartoon 10.31.2014


Back to the Global Macro Grind


Isn’t that a nice way to start your week? After doing California last week, I’m in London today. I’m looking forward to seeing whether or not European investors have a visceral response to both the US cycle and secular demographic data #slowing.


#NoWorries, mates.


The way this macro show in the US goes is pretty straightforward. Just read the Barron’s Roundtable for a consensus on that. Yep, growth slowed due to “one offs… weather… etc.” but it will “bounce back” – so back end load those growth and earnings forecasts in 2015.


As you can see in the Chart of the Day, after the Old Wall and its media got blindsided by the Q1 earnings season (smoked in January) it proceeded to cut earnings estimates for the 1st half of 2015. In the 2nd half (and 2016) it’s right back to rainbows and puppy dogs.


Notwithstanding that you’d have to see things like producer prices (commodities, etc.) ramp big (from here) while:


A) the Dollar is rising due to

B) consensus expectations of a “rate hike”,


we’re still calling for both a cyclical and secular (demographic) slowdown.


Newsflash: to get things like Oil prices and PPI (producer prices) up year-over-year, what the Fed actually needs to do is devalue the Dollar and start talking up no-rate-hike. In other words, the bull case for stocks, commodities, and bonds is #SlowerForLonger.


Don’t buy that narrative? Or does it just make you feel something that just ain’t right? Macro markets don’t feel anything – they just tick. Last week’s catalyst for the Dow Jones Industrial Index (DIA) to be up for the 1st week in the last 4 was a DOWN DOLLAR:


  1. US Dollar Index  was down -1.4% last week (down -4.5% in the last 3 months)
  2. Dow, SP500, and Russell 2000 +0.3%, +0.1%, and +0.3% on the week, respectively
  3. Commodities (CRB Index) = +0.4% week-over-week (+4.1% in the last 3 months)
  4. Oil (WTI) = +1.4% week-over-week (+14.7% in the last 3 months)
  5. Gold = +1.0% week-over-week (+2.2% in the last 3 months)


Oh yeah, baby – how do you feel about that? And how, by the way, would you feel if the Fed does precisely what the Fed has been doing since that ugly March employment data point (released at the beginning of April, arresting the USD at epic 10 month highs)?


Need #MoarrrEasing? If you are in the business of never seeing a US asset price depression/recession again, I think the answer to that question is yes.


I think they called it The Great Recession. In reality it was the last time the US cycle slowed, but the 1st time that its core consumer spending cohort (35-54 Year old #Boomers) saw the year-over-year % change in population growth go negative.


(hint: 35-54 yr-old population growth is still negative and will be until the year 2020 – so I’m all in on a 2020 rate-hike)


Oh, and the meeting of that cyclical and secular slowdown (2007-2009) resulted in a “36.3% drop in the incomes of the top 1% of earners in the Unites States, compared to an 11.6% drop for the remaining 99%” (The End of Power, pg 6).


I’m not a boomer. So don’t blame me. Don’t blame my Mom & Dad just because they are Canadian either, eh. Instead, if the Fed hikes “just because it’s time”, you can congratulate Yellen for closing the “inequality gap” – because the pace of asset #deflation will be visceral.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.50%

SPX 2072-2104
Nikkei 20061-20767
VIX 12.61-15.65
USD 94.01-95.98
YEN 122.61-125.46
Oil (WTI) 57.78-61.80

Gold 1167-1198


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Macro's Visceral Edge - Chart of the Day

Sucking & Guiding

This note was originally published at 8am on June 01, 2015 for Hedgeye subscribers.

“We are here to guide the public opinion, not to discuss it.”

-Napoleon Bonaparte


By evidence of both his actions and the aforementioned quote, by the time of Napoleon’s self-organized coronation at Notre-Dame on December 2nd, 1804 he wasn’t the same man of The People. Sadly, with most things political power, some level of liberty was lost.


It wasn’t always that way in France. After replacing the aristocracy (The Directory), Napoleon introduced “nobility based on merit – one in which 20% came from the working classes; 58% from the middle classes…” (Napoleon, A Life – pg 465)


Two hundred years later, America is much more like France that it has ever been. After a negative -0.7% GDP report on Friday, both the US government and the un-elected Federal Reserve will be guiding mainstream media opinion this morning, not discussing it.


Sucking & Guiding - GDP cartoon 05.29.2015


Back to the Global Macro Grind


So let’s discuss why the US economic data continues to slow here in 2015. The government has not yet been able to centrally plan away the calendar. It’s June, and it’s not snowing anymore.


Just to get you caught up on the Q2 (non-weather adjusted) US economic data:


  1. US Retail Sales (which represents almost 25% of the GDP report) slowed to 0.9% year-over-year in April
  2. US Durable Goods slowed to -2.3% year-over-year in April
  3. The Chicago PMI got wrecked (that’s a May print) to 46.2 vs. 52.3 in April


To be fair, Chicago’s not all about the Blackhawks right now. The windy city’s debt just got downgraded to junk. And, to be doubly fair, the US Housing data (pending home sales reported last week +3.4% in April) has been as good as the #LateCycle data = bad.


Yeah, being long #LateCycle stuff like inflation expectations and industrial stocks has really sucked for the past few weeks. Then again, that asset allocation has really really really sucked since, well, around this time last year.


Even though the US Dollar slowed its bounce on the bad US GDP report on Friday, bigger picture, it was up for the 2nd straight week, +0.9% to +7.4% for 2015 YTD – and here’s what else happened in macro markets on that:


  1. Burning Euros and Yens dropped -0.2% and -2.1%, respectively (YTD = Euro -9.2%, Yen -3.6%)
  2. Commodities (CRB Index) was -1.1% on the week to -2.9% YTD
  3. Energy (XLE) and Industrial (XLI) stocks led USA losers -1.0% and -1.9% wk-over-wk, respectively


Did I say being long the Industrials during a #LateCycle slowdown sucked? Yep. Big time. Why on earth would you be long anything that is trading on peak-margins as A) the cycle is clearly slowing and B) the US Dollar is strengthening?


To get the US Dollar and Rates right, you do have to get the rate of change in US growth (and its expectations) right. But you can’t ignore what all of these other slowing global economies are seeing from a currency devaluation perspective all the while.


The Brazilian Real, for example, lost another 2.7% of its value last week (it’s -16.6% YTD vs #StrongDollar) and the flailing Russian Ruble had a run of the mill -4.5% currency valuation draw-down.


Right. Right. #LetsNotDiscussThis


Instead, let’s discuss what everyone and their revisionist macro brother was chasing in terms of a narrative (when the German Bund Yield tapped 0.75% three weeks ago; this a.m. = 0.49%) – that “inflation is back and accelerating”, or something like that…


  1. Break-evens (5yr US) dropped 8 basis points and are now down -13bps in the last month to a paltry 1.61%
  2. US 10yr Yield fell another 9 basis points on the week to 2.12% (another -10% correction, on bond yield terms)


I know, I know. Do not tell the Bond Bears that they got plugged calling the mother-of-all-tops in the Long Bond (again). We’re having too much fun front-running this epic mismatch between #GrowthAccelerating expectations and economic reality.


From a sentiment perspective, at least the shorts have been covering their Long Bond positions – here’s the latest Consensus Macro report, in non-Commercial CFTC futures/options contract terms:


  1. Long-Term Treasury (10yr) net SHORT position has been cut in half from -163,965 (6 month avg) to -81,045
  2. US Equities (SP500 index + Emini) net SHORT position has shot up to -56,264 from a +26,103 6 avg (6 months)


In other words, consensus doesn’t believe that the US government can make up another version of GDP fast enough and has expressed #GrowthSlowing explicitly by being A) less bearish on bonds and B) more bearish on stocks.


And if you’re sitting there saying to yourself that this is actually bullish for both stocks and bonds, you’re probably right. All you need is one more bad jobs report and both the Fed and US government is going to guide you to believing that sucking is the new bull case.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.99-2.19%

SPX 2101-2122
USD 96.02-98.39
EUR/USD 1.07-1.13
Oil (WTI) 56.99-61.31

Gold 1173-1200


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Sucking & Guiding - z 06.01.15 chart