P: Good Print, Odd Pivot (2Q15)

Takeaway: P's new plan to ramp 2H15 marketing expense is an odd pivot this late in the year. Mgmt may be getting more nervous about Web IV.


  1. GOOD PRINT: P produced upside to 2Q estimates on a reacceleration in ad revenue growth, and also guided high 3Q15 revenues (we expected soft 3Q guidance).  The biggest surprise from 2Q15 was a sharp acceleration in Advertising RPMs growth (up 25% vs. 15% in 1Q15), which on a stand-alone basis would be very encouraging, but was largely fueled by a sharp deceleration in listener hour growth from fewer skipped tracks (enhanced user customization).  The one blemish was the consensus miss on Active Listeners, which we continue to expect will decline y/y by 4Q15.  Regardless, a better print than we expected.
  2. ODD PIVOT: P softened its tone a bit regarding Web IV, suggesting that it’s planning for a range of potential outcomes, which is naturally the prudent move, and not a concern.  But what caught us by surprise was P's new plan to ramp 2H15 marketing expenses.  P left 2015 EBITDA guidance in tact despite net 1H15 upside ~$12M, which is supposedly going toward incremental 2H15 marketing.  For context, marketing spend was $17.6M in 1H15, and $16.4M for all of 2014.  We suspect this marketing ramp is either a sign that P is increasingly concerned with its attrition OR that P is trying to make a late push into its higher-ARPU subscription product ahead of a potentially crippling Web IV decision for ad-focused model.  Either way, it’s an odd pivot this late in year, especially following closing arguments for Web IV this past Tuesday.  
  3. WEB IV IS ALL THAT MATTERS:  We have been writing about this ad nauseam, so we'll keep this brief, and refer you to the links below.  We expect P is going to lose the one debate that it can't (bifurcated royalty), and our take from Web IV final arguments is that P will be the odd man out from the tacit horse trading between SX and NAB/IHRT.  For more detail, see links below.  


Let us know if you have any questions, or would like to discuss in more detail.  


Hesham Shaaban, CFA






P: Notes from WebIV Closing Arguments

07/22/15 01:26 PM EDT

[click here]


P: Losing the Critical Debate?

04/08/15 08:53 AM EDT

[click here]


P: Worst-Case Scenario? (Web IV)

03/23/15 09:30 AM EDT

[click here]


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]







July 24 11am-2pm:  PENN Plainridge tour and investor day

July 28 8:30am: WYN 2Q CC ; PW: WYNDHAM

July 29 10:00am: HLT 2Q CC ; PW: 74328196

July 30 9:00am: HST 2Q CC

July 30 10:00am: MAR 2Q CC ; PW: 66506287

July 30 1:00pm: HOT 2Q CC ; PW: 69941686

July 31 10:00am: RCL 2Q CC 

August 1

  • Wild Rose Jefferson opens
  • St Regis Macau opens

August 4: 11:00am: MGM 2Q CC ; PW: 0575269

August 4: 5:00pm: AWAY 2Q CC

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)


MPEL - Declining GGR risks need for austerity from Macau gaming operators, according to Lawrence Ho, CEO of MPEL

  • “As the [Macau] Secretary for Finance said, this [GGR monthly tally] is kind of right at the level where the [Macau] government might need to look at austerity measures, which would be less than ideal,” Ho said.
  • “If the government is looking at austerity measures, maybe a lot of other businesses – including gaming operators – will have to look at it as well,” he added. He did not say what those cost-cutting measures could be, according to media reports
  • Ho also said they will soon announce the opening date for Studio City, which is 95% complete.



MGM - A 15% to 25% loss in gaming revenue was possible if a blanket smoking ban would be imposed on casinos, as had been the case in other gaming jurisdictions, MGM China CEO Grant Bowie said Thursday.  Bowie insisted that smoking lounges were a “very good compromise” vis-à-vis the government’s proposal to impose a full smoking ban on all gaming premises, comprising mass gaming floors and VIP rooms.



McCarran Passenger Traffic - Las Vegas Intl. Airport reported the following traffic numbers for June: 

  • Total passenger traffic was 3,911,813 vs. 3,698,373 in June of 2014, good for a 5.8% YoY increase
  • June's numbers bring the YTD total to 22.1 million vs 21.2 million in 2014, a 3.8% YoY increase.
  • Domestic passengers made up 3,533,752 of the total, a 5.7% YoY increase
  • International made up 291,011 of the total, a 3.8% YoY increase. 
  • Helicopter passengers made up 87,050 of the total, a 15.3% YoY increase. 

LEISURE LETTER (07/24/2015) - MPEL, MGM, CCL - McCarran June Numbers

Takeaway: McCarran continues to exhibit strong visitation numbers.

Louisiana GGR June - SSS: (8.25%) YoY 

Takeaway: Smoking ban taking its toll. June overall was a little softer than expectations but we are projecting a strong July comeback, potentially up 5% in same store regional gaming revenue.


South Korea Visitation- The number of foreign tourists visiting South Korea fell 41% YoY in June, due to fears about an outbreak of Middle East Respiratory Syndrome (MERS) in that country, statistics showed and officials confirmed.  South Korean casino operator Paradise Co Ltd – which runs venues catering only for foreign players – saw a 50.2% YoY decline in casino sales in June, the firm had said in a filing to the Korea Exchange on July 6.  The June 2015 inbound tourism numbers showed approximately 750,900 arrivals, compared to 1.27 million in the year-prior period, said the Korea Tourism Organization.



Malta Cruise Traffic - Cruise passenger statistics published for the second quarter of 2015 show a 66.4% YoY increase for Malta.  The number of cruise ships calling in the Maltese Islands grew from 89 calls in April to June 2014 to 108 calls this year. For the first six months of the year, traffic is up 39.9% YoY.  Malta’s cruise sector is on a growth curve particularly as a result of a number of positive initiatives, said the tourism authority, ranging from strong performance by MSC and Costa, along with TUI homeporting.



UBER in Las Vegas - Cab company owners attending Thursday's Nevada Taxicab Authority session called it the most important meeting in the board'€™s history.  An industry proposal that deregulates several aspects of cab licensing won approval, setting the stage for a more competitive environment between cabbies and contracted Uber and Lyft drivers.  

  • Owners applauded after the board's 4-0 vote that will eliminate time and geographic restrictions on cab medallions and convert them to around-the-clock use in any location in the county. The board also approved the addition of 20 new medallions per company, 10 immediately and 10 more effective Nov. 1. That'€™s 320 more cabs between the 16 companies.

  • The move effectively allows cab companies to convert 791 time-restricted medallions and 433 geographically restricted medallions to unlimited use.

  • The end result is that there will be nearly twice as many unrestricted cabs, 2,730 compared with 1,443, on the road once every restriction is lifted.


Takeaway: Taxis trying to remain competitive with Uber.


Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.

CHART OF THE DAY: The Russell “Value” Index vs. The Russell “Growth” Index

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. If you would like to stay a step ahead of consensus we invite you to learn more and subscribe.

*  *  *  *  *

...For your “value” friends who don’t do macro cycle work, please send them my way. I have a very basic lesson I learned a long time ago about thinking a cyclical that is tied to commodity #deflation is “cheap”: it’s going to get cheaper.


As Darius Dale shows in today’s Chart of The Day, the Russell “Value” index is underperforming the Russell “Growth” index by almost 1,100 basis points (that’s the most since, well, global growth really slowed in the summer last time = 2011).


CHART OF THE DAY: The Russell “Value” Index vs. The Russell “Growth” Index  - z dd Chart of the Day




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Got Aretas?

“Aretas  meant that competing had shaped you into a better person.”

-Po Bronson


No, the highly competitive nature of this profession hasn’t made everyone a “better person.” The fact is that if you want to see someone’s true character, either give them lots of money and power – or hold their #process to account when they are losing.


This week was a humbling one for me on that front as many men and women who have a lot more money than I’ll ever have gave so graciously to our growing Hedgeye Cares charity. On behalf of my team, thank you for your Aretas. It matters.


In many ways, Homer’s The Iliad and The Odyssey are paeans to aretas. Both Achilles and Odysseus who hone their aretas over the duration of the epic poems. In The Iliad, the questions of why we fight, whom we fight for, and how we maintain honor while fighting help define the aretas. The Odyssey portrays sports prowess, endurance, self control…


The Ancient Greeks did not fear that competition bred immoral behavior. They believed that competition taught it.”

(Top Dog – The Science of Winning and Losing, pg 14)


Got Aretas? - z km golf 1


Back to the Global Macro Grind


So forget that it’s a summer Friday and fire yourself up for some competition this morning! Last I checked, Mr. Macro Market doesn’t take vacation. In many ways, this summer is starting to feel a lot like the summer of 2011.


But why do we “feel” anything about markets? Can’t we just turn our emotions off and not thirst for victory or cringe at the prospect of defeat? I can’t. And unless you were one of these machines just chasing price momentum, you probably can’t either.


What we feel is generally driven by the score of this game. That’s why we play it. Whether you were long SBUX or AMZN into their earnings prints, it’s #timestamped right there in front of you. Yesterday’s Global Macro score was one that left a mark:


  1. Most things #Deflation (Commodities and countries/sectors linked to them) have been smoked this week
  2. Credit markets linked to inflation expectation expectations (Energy Junk Bonds) are back at their YTD lows
  3. Dammit, they even sold off the SP500 for a 3rd straight day!


#NoWorries though, you can buy Amazon (AMZN) on the Barclays upgrade this morning (+18% pre-market) for 1,000x earnings, or something like that. Heck, that’s cheaper than something biotech that has no earnings at all.


I wrote this yesterday and I’ll write it again – in Style Factor terms, if a stock has:


  1. SIZE (big cap)
  2. LIQUIDITY (you can get in/out of your position in 1-3 days)
  3. NICE CHART (i.e. price momentum machines can chase)


You are all set. That’s why I kept Starbucks (SBUX) on the long side of Real-Time Alerts. Is there a legitimate debate on why the stock shouldn’t trade at 55x earnings if people are willing to chase it at 35x?


C’mon, let’s get real here. This has nothing to do with your business school “valuation” models. This has everything to do with what always happens when you can buy neither Global Growth nor Inflation – you have to chase the last growth you can find.


For those of you still keeping score on the GROWTH and INFLATION data, here it is this morning:


  1. CHINA: PMI slowed (again) in July to 48.2 from 49.4 in June
  2. EUROPE: Germany and France saw their PMIs for July slow (again) to 51.5 and 49.6, respectively
  3. JAPAN: PMI accelerated (again) in July to 51.4 from 50.1 in June


Pardon? Buy Japan as both the absolute (rate of change) and relative momentum of its growth factor is beating China and Europe? Yep. That’s the really cool kids’ portfolio – long AMZN, SBUX, and Nikkei!


Oh, did I mention that Japan’s rate of change in growth will be accelerating in the 2nd half of 2015 as the beloved navel gazer market (USA) slows? What the un-cool kids own are basically US cyclicals (I think they’re now called “value” stocks):


  1. Industrials (XLI) down another -0.9% yesterday (down -4.4% in the last month)
  2. Dow Transports down another -2.1% yesterday (down -4.1% in the last month)
  3. Russell 2000 down another -1.1% yesterday (down -3.0% in the last month)


So much for the “global growth is back, buy reflation” idea…


For your “value” friends who don’t do macro cycle work, please send them my way. I have a very basic lesson I learned a long time ago about thinking a cyclical that is tied to commodity #deflation is “cheap”: it’s going to get cheaper.


As Darius Dale shows in today’s Chart of The Day, the Russell “Value” index is underperforming the Russell “Growth” index by almost 1,100 basis points (that’s the most since, well, global growth really slowed in the summer last time = 2011).


I guess that’s why I’m feeling something this morning. I’m all fired up, taking a few shots at the competition (is that impolite while they’re revising GDP growth from 4.0 to 3.0?). Bob, weave, jab – it’s ok to compete. This isn’t Ancient Greece, but it is Wall St.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.24-2.36%

SPX 2093-2130
Nikkei 209
VIX 11.88-14.37
USD 96.62-98.45
Oil (WTI) 48.03-50.95

Gold 1068-1121


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got Aretas? - z dd Chart of the Day


Starbucks (SBUX) delivered an incredible quarter.  The company posted a significant increase in traffic trends, a trend which requires us to remove Starbucks from our SHORT bench.


This was short lived skepticism for us as we were looking for a downward trend in traffic, lower adoption rates of Mobile Order & Pay, and a decrease in food sales, all of which did not occur. SBUX posted yet another record quarter of performance in 3Q15 reporting yesterday after the close, beating estimates across the board. Q3 revenue was $4.88B versus consensus estimates of $4.87 a 17% increase YoY. Comparable same-store sales (SSS) increased +7% compared to estimates of +6.1%, a 300 basis point increase YoY. Of the consolidated numbers, the Americas segment reported +8% SSS versus consensus of +6.3%, EMEA reported +3% versus consensus of +3.8% and CAP reported +11% versus consensus of +8.5%. Reported EPS ex-items for Q3 was $0.42 versus consensus of $0.41.


As you can see the strong performance was global, with no region disappointing. The growth seen in transactions is possibly the most impressive in the quarter, given the number of stores they have, as they are adding stores cannibalization does not seem to be an issue. Two year traffic trends in the Americas segment are turning positive, evidenced by the chart below:




This is truly one of the best run company’s not only in the restaurant sector but in the world. Management’s great execution across platforms is testament to their long-term strength. And although we are not chart chasers so therefore will not recommend a buy at these levels, we certainly can’t short it here either.


Cycles, Macro and Multiples

Client Talking Points


This is probably our most contrarian theme that isn’t being bandied about yet – post the Greek clown show, in rate of change terms, European econ data continues to slow; German PMI 51.5 (new year-to-date lows) this morning and France back < 50 at 49.6 JUL vs 50.7 JUN. 


Nasty week for anything linked to this uber-macro risk; don’t forget this is a credit risk signal inasmuch as it is a draw-down one for commodity linked currencies/countries. Russian stocks are down -1.3% this morning (-8.2% in the last month); Brazil -2.1% yesterday (-6.6% month-over-month).


Getting lots of questions on this exposure as the Russell 2000 is now -3% month-over-month (bearish TREND signal) but the “Russell Value” (IWN) is underperforming Russell Growth by 1100 basis points (its widest margin since 2011) – we liked IWM in Q1, but definitely not here.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.


According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.


After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road


TREASURIES: good wk for $TLT bulls, 2.28% 10yr as both global growth and inflation slow



Living at risk is jumping off the cliff and building your wings on the way down.

Ray Bradbury


0.3% of solar energy from the Sahara is enough to power the whole of Europe.

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