INSTANT INSIGHT: If the Fed Opts for One Rate Hike…

Good morning from London.


So, we got another nice pullback for bond yields off of last week’s panic highs. The US 10-year yield down -22 basis points in less than a week after the US Dollar failed to reclaim TREND support.


I’ve been looking for a dovish Fed since the March 18th meeting, so I’ll reiterate what they should do (see 3 Charts - Don't Hike) given the slowing data – USD agrees.


So, if the Fed opts for one rate hike “just because it’s time” … then I think stock, bond, and commodity market risks ramp.


INSTANT INSIGHT: If the Fed Opts for One Rate Hike… - z ben ryan


Editor's Note: This comes from research written by Hedgeye CEO Keith McCullough earlier this morning. If you're serious about stepping up your market game we encourage you to take a look at our offerings.

LEISURE LETTER (06/16/2015)

TICKERS: Galaxy Entertainment (0027.HK), G13.SI, RCL, HOT, HLT, SGMS, CCL

HeadLine NewS 

Galaxy -  Business at the second phase of Galaxy’s Cotai casino resort “is satisfactory, but not as good as what we expected,” Chairman Lui Che Woo said after the company’s annual general meeting, adding he expects further impact of its gaming business if the city allows a smoking ban to be extended to VIP rooms. 


Phase 2 “will be better in the next one to two months,” said Galaxy Vice Chairman Francis Lui, adding he was happy with the performance of the non-gaming elements at its new properties such as its hotel bookings and dining outlets.


“Be patient, we believe the scale, facilities and services of the second phase are the best,” he said. Business should improve in July and August, compared with June which is an exam season for students, he added.


Takeaway:  Share gains in June due to good luck and the opening of Phase 2, not just the expansion. Comments can only be taken as a disappointment. 


Cruise Selling Agents Report Robust Sales for First Half of 2015 - Agencies show: Soft sales out of Asia Pacific, Australia, New Zealand, Mexico. Strong sales out of Alaska. Strong uptick in interest for World and River Cruises.

  • Lucinda Belden, franchise owner,CruiseOne in Carrollton, TX, says her agency has posted a 19% increase in cruise sales thus far this year, compared to the same period last year. 
  • David Walsh, owner of CWCruises, an independent agency of Avoya Travel in Bradenton, FL, says sales for his agency have never been better.
  • Geoff Cox, supplier relations director for KHM Travel Group, a member agency in Brunswick, OH, reports: “Our 2015 sales with several cruise lines are up over 35%.”


Takeaway: Overall, bookings have been strong in 2015 but it's far from a perfect picture.


GENTING SINGAPORE – On June 16, bought back 2.5 million shares at S$0.91 each. On June 15, Genting also bought 7.5 million shares at S$0.91 each.

Takeaway: These share buybacks continue but larger in the the last 2 days.

SGMS - Launches Online Titles With Paddy Power.  Bob Hays, vice-president, commercial, interactive at Scientific Games, added: “The interest in our full slots and table games library from Paddy Power, widely considered one of the top online casino operators in Europe, is another testament to the wide player appeal of the proprietary and third party brands in our portfolio." 


HOT - announced the planned spin-off of its vacation ownership business into a separate publicly traded company. Starwood Vacation Ownership (SVO), which will be named Vistana Signature Experiences, Inc. upon completion of the spin-off transaction, has filed an initial Form 10. 


Takeaway:  Completion of spin-off of SVO on track for Q4 2015.


ARC Hospitality Trust - ARC Hospitality announces agreement to acquire portfolio of 13 Hotels for a purchase price of $300 million from Noble Investment Group.($156,822 per key)  


The Noble Portfolio consists of 12 premium-branded select-service and extended-stay hotels and one full-service hotel totaling 1,913 rooms. The hotels are franchised by major global brands including Hyatt Hotels, Hilton Hotels & Resorts and Marriott International. Hotel flags include Hyatt Place®, Hilton Garden Inn, Hyatt House®, Courtyard by Marriott and Hilton. 



CCL - Costa Croicere has announced the Costa Fascinosa will join the Costa Pacifica in South America for the upcoming 2015/2016. The Costa Fascinosa increases the company’s capacity in the region, as it takes over from the previously announced Costa Mediterranea, which is a slightly smaller vessel. The Costa Fascinosa had been set to stay in the Mediterranean for the winter, but will now make up the line's two ship program in South America.


"With the operation of Costa Fascinosa, we are increasing our capacity by 41% out of Rio,” said Rene Hermann, General Director of Costa Cruises to South America.



Macau instant lottery - The government has renewed for one more year Sociedade de Lotarias e Apostas Mútuas de Macau Lda’s concession to run instant lotteries and take bets on football and basketball, the Official Gazette says. The concession had been due to expire on June 5.



Macau govt finances - The government’s fiscal surplus was MOP25.28 billion (about US$ 3.16 billion) in the first five months this year, 54.9% less than in the corresponding period last year, the Financial Services Bureau says. Additionally: The government collected a total of MOP38.45 billion (US$4.82 billion) in direct taxes from gaming in the first five months of 2015, down by 35.4% YoY, according to data disclosed on Monday by the city’s Financial Services Bureau.




UK - The National Lottery is about to change the way millions choose their lotto numbers by adding ten more balls to the pot. In the biggest change in its 21-year history, players will be able to select from 59 instead of 49 numbers - while average jackpots are going to TRIPLE. 

  • Camelot said the revamp, due in October, would create an extra 1.8 million winners a week and increase the overall chance of winning any prize from one in 54 now to one in 9.3.




CT SS Revs: -0.51% YoY

FL SS Revs: +11.38% YoY

NY SS Revs: +2.52% YoY 


London - Negative performance for London Hotels in May. Based on the data:

  • increases in supply (+3.3%) and demand (+4.1%);
  • a 0.8% decrease in occupancy to 85.0%;
  • a 10.8% decrease in average daily rate to GBP125.91; and
  • a 10.1% decrease in revenue per available room to GBP107.04.


Takeaway:  London REVPAR in 2Q has underperformed.


South Korea - Flight bookings to South Korea have plummeted following the outbreak of MERS, according to ForwardKeys, a company that analyzes flight data. Data shows that between May 20 and June 5, international flight bookings to South Korea were down 14.9%, compared to the same period last year. Additionally, flight cancellations were up 21.3%, compared with the same year-ago period. 


Takeaway: MERS should not be disregarded. Macau inboard visitation, S Korea lodging and Asia-destined cruise lines could already be affected.



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.

Retail Callouts (6/16): UPS Pushes On Pricing, Chain Stores Sales, UA, NKE

Takeaway: UPS pushes on pricing, with retail margins at peak, and retail sales slowing.

UPS Bulk Item Rate Hikes Bad For Retailers


Takeaway: Any way you cut it, this is bad news for retailers. The fact is that consumers increasingly expect retailers to offer up free shipping. In fact, we think that 'free shipping' will be an industrywide standard by the end of 2016. So the question is this -- If the shippers are starting to push back on pricing due to capacity constraints, and if consumers are highly unlikely to broadly accept paying for shipping when it was otherwise free -- then who is going to foot the bill? Yes, the retailers. If the retailers can find a way to push it back to their suppliers, then they'll do it. But very few have that power.  This is not what we want to see when retail margins are tracking at an all-time high, and makes it increasingly difficult to be bullish on this group, broadly speaking.

Retail Callouts (6/16): UPS Pushes On Pricing, Chain Stores Sales, UA, NKE - 6 16 chart1


UA - Class C Stock Dividend to Maintain Plank's Control

Takeaway: We rarely see stock splits structured in this manner, but this is all about Plank keeping control of the Board. He's currently sitting on 66.5% of the vote with 100% of the class B stock, but his ownership position has fallen almost 2 percentage points in a year from 18.5% in 2014 to 16.8% in 2015. At an ownership position below 15%, Plank's class B shares would be converted to class A and his grip on the company would be far less secure than it is today. The new class C structure the company announced yesterday is designed 100% to mitigate that risk.


UA, NKE - Sold-Out Curry MVP Shoe Price Doubles Online


Takeaway: This is the first time we've seen UA basketball kicks hit the resale market in a material way. Nike engineered its distribution process to build hype in the aftermarket long ago, and has a few SKUs (The Air Yeezys for example) that are listed on eBay for $10k+. For UA, it's likely more supply than demand related...but whichever way you slice it, it's a win for UA. The company has found a star in Curry. The company has a lot of wood to chop both on the product and infrastructure side before it declares victory -- its footwear sales in 2014 at $430mm were only 25% greater than what Lebron James did for Nike alone. But it now has an asset it can use to grow the platform and demand is building evidenced by the activity in the resale market. The reality is that the technical merits of a product become far less important when they are for an athlete who is as universally likeable as Curry.

Retail Callouts (6/16): UPS Pushes On Pricing, Chain Stores Sales, UA, NKE - 6 16 chart2


Retail Sales Begin What Should be a 15-Week Deceleration

And so it begins… sales this week according to the ICSC index were up only 1.9%, the lowest rate in 15 weeks. Unfortunately, the weekly sales growth rate should be under added pressure through the end of September (i.e. through back-to-school) as we comp against a solid Summer of 2014.

Retail Callouts (6/16): UPS Pushes On Pricing, Chain Stores Sales, UA, NKE - 6 16 chart3

Retail Callouts (6/16): UPS Pushes On Pricing, Chain Stores Sales, UA, NKE - 6 16 chart4





House Bill Aims to Close Internet Sales Tax Loophole



GPS - Gap Closing 175 North American Stores



LL - Lumber Liquidators promotes marketing head, cuts merchandising chief



OLLI - Ollie’s eyes IPO and 950 stores



Kmart taps DSW executive as marketing chief


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Client Talking Points


The U.S. 10YR Yield is down -22 basis points in less than a week after the U.S. Dollar failed to reclaim TREND support. We’ve been looking for a dovish Fed since the March 18th meeting, so we’ll reiterate what they should do, given the slowing data – USD agrees – so if the Fed opts for one rate hike “just because its time” we think stock, bond, and commodity market risks ramp.


The German DAX continues to breakdown alongside a stabilizing Euro (Down Dollar = Up Euro); risk range there is finally tightening to $1.11-1.15 ahead of the Fed meeting. European stocks do not like a strong Euro and are still signaling bearish TREND across the board (ex-FTSE).


Terrible data, terrible day for the XLI (industrial stocks) – we shared the rate of change chart for Industrial Production in May (not affected by the “weather” excuse) – we don’t know how someone could signal bullish on cyclicals with Transports and Industrials looking like they do.



The Macro Show - CLICK HERE to watch a replay of today's show with guest analysis from Energy Sector Head Kevin Kaiser. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Penn National Gaming will likely tee off on the bears with a strong Q2, upward 2015/2016 EPS revisions, and the start of a 2 year growth period. PENN’s stock has climbed 27% this year on stabilizing regional gaming revenues, transaction-fueled optimism (real estate) surrounding the regional gaming companies and proximity to the opening of the new Plainridge racino on June 24. So what will drive even more upside? More and better. We think regional gaming trends are even better than anticipated by the Street and Q2 earnings should be a solid beat even before Plainridge contributes.


Housing outperformed in the latest week alongside choppy price action in equities and further, extraordinary volatility in sovereign bond markets.  Fundamental data was light with weekly purchase applications data from the MBA the lone release of import for the industry.  The first, high-frequency update on purchase demand in June, however, was positive. Purchase demand rose +9.7% sequentially, taking the index to its strongest level in 2 years at reading of 214.3. On a year-over-year basis, growth accelerated for a  4th consecutive week to +14.6%. Inclusive of last weeks gain, demand in 2Q is tracking +14.3% QoQ and +13.4% YoY.


The market has been jockeying for positioning in front of next week’s policy statement from Janet Yellen. We believe Yellen signaling that she remains “data dependent” (i.e. repeats what she said at the March 18thmeeting) is the most probable outcome. To be clear, we remain the long-bond bulls (TLT, EDV, MUB). With that being said we aren’t claiming to be able to predict the outcome of next week’s meeting (sure we do have biases). What we do know is that Hedgeye estimates for growth and inflation shake out much lower against both consensus and central bank forecasts for the full year 2015 (remember that this is after their forecasts have already been downwardly revised).

Three for the Road


ASIA (ex-Shanghai): in the last mth, Hang Seng -6.4%, Singapore -4.8%, KOSPI -3.7%

#GrowthSlowing @HedgeyeDDale



Create your future from your future, not your past.

Werner Erhard


The Chicago Blackhawks won the Stanley Cup for the 3rd in 6 seasons with a 2-0 victory against the Tampa Bay Lightning in Game 6 of the Final last night.

CHART OF THE DAY: Fed Funds Rate vs Unemployment Rate (Since the 1950s)

Editor's Note: Below is a brief excerpt and chart from today's morning note from Hedgeye. It was written by Daryl Jones who is Director of Research. Click here for more information on how you can subscribe.


...In the Chart of the Day below, we show the Federal Funds rate versus the unemployment rate going back to the 1950s.  We don’t need an advanced degree in mathematics to see that this period is different than many others.  Despite the unemployment steadily coming down (albeit unemployment is not necessarily the best measure of the health of the employment market domestically), the Fed has, well, not moved.


CHART OF THE DAY: Fed Funds Rate vs Unemployment Rate (Since the 1950s)   - z 06.16.15 chart

The New Frontiers

“There exists limitless opportunities in every industry.  When there is an open mind, there will always be a frontier.”

-Charles Kettering


Charles Kettering may be one of the most accomplished men you’ve never heard of before.  He passed away some 60 years ago, but his ingenuity lives with us today.   As Wikipedia describes him, he was an inventor, engineer, businessman, and holder of 186 patents.  The last point is what got me: 186 patents!  Now that’s a lifetime of work.


His handwork and ingenuity touched a number of industries– he was responsible for the Freon refrigerant for refrigeration and air conditioning systems, he developed the first aerial missile, and the electric starter for the automobiles.   To the point of his quote, Kettering was not afraid of new frontiers.


Speaking of new frontiers, tomorrow the FOMC gives us their rate decision.  We aren’t expecting any surprises. We continue to stick with our view (as emphasized in the Hedgeye cartoon below) that economic growth will remain lower for longer, which in turn means that the Fed is likely to be dovish for longer. 


The new frontier in monetary policy of course is the Fed’s decision to remain at effectively zero percent interest rates for the last, oh, seven years.   Not only has the Fed been more accommodative than any time in its history, but it has been accommodative longer than at any point in its history.   In exploring this new frontier, though, the question we should ask ourselves is whether the Fed has completely missed the economic cycle.

The New Frontiers - Growth cartoon 11.10.2014


Back to the Global Macro Grind...


In the Chart of the Day below, we show the Federal Funds rate versus the unemployment rate going back to the 1950s.  We don’t need an advanced degree in mathematics to see that this period is different than many others.  Despite the unemployment steadily coming down (albeit unemployment is not necessarily the best measure of the health of the employment market domestically), the Fed has, well, not moved.


The challenge now with potentially starting to increase interest rates is that we are very near the top of the business cycle.   As we highlighted in our Q2 Themes deck, we are at month 74 of the current expansion.  This is in comparison with a mean expansion of 59 months and median of 50 months over the past century. 


As it relates specifically to the employment market, initial claims are probably one of the best leading indicators.  Currently, jobless claims are in the 300K range, which are literally as good as they get.  Historically, going back to the mid-1960s, jobless claim improvement has peaked 7 months before the economic cycle peaks.


So, as it related to a new frontier, we are certainly in one.  In fact, we would submit that never before has the perceived plan been to tighten monetary policy into the peak of an economic cycle!  Of course, maybe the Fed will actually stay dovish longer than expected...


But if you need any insight of where consensus is on interest rates, look no further than a poll from CNBC (as consensus as consensus gets) this morning.  According to the poll, 92% of respondents see a rate hike this year, which is up from 84% in the April survey.   The only poll we’ve seen this morning with more certainty is the poll of whether July follows June (93% of respondents believe that to be true). 


Other than the FOMC decision tomorrow, the other topic that is dominating global macro market headlines this morning is Greece.  Some are calling it a tragedy, some are calling it a victory, and some may even see it as an opportunity.   Back in small town Canada, they would probably call it a gong show, but here we are . . . on the brink of another Greek default.


As U.S. centric equity investors, the central question of course is whether Greece defaulting or leaving the Euro really matters.  The short answer is probably not.   As it relates to Europe, the answer is much less clear.  Setting aside the actual financial implications, perhaps the most significant fact is simply that the ECB has provided 118 billion euros in loans to the Greek banking system, which is equivalent to 2/3rds of Greece GDP.  That, my friends, is a lot of euros!


The larger issue though is one of confidence- confidence in the euro by outside investors, confidence in the economies in the peripheries such as Italy, Portugal and Spain, and confidence in a European sovereign debt market that is all but priced to perfection.  It seems like an elixir for sustained weakness in the euro.


Certainly, though, it is possible that the proposed emergency summit on Greece tentatively scheduled for this Sunday may forge some cooperation between Greece and her creditors.  Of course, the reality of that happening is, well, not very realistic.  Or as John Lennon said:


“Reality leaves a lot to the imagination.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.11-2.48%

SPX 2070-2095

Nikkei 20032-20661

VIX 14.20-15.93

Oil (WTI) 58.01-61.90

Gold 1167-1199 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The New Frontiers - z 06.16.15 chart

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