The Macro Show Replay | August 6, 2015



Takeaway: Focus will now turn to 3Q15, the strongest quarter for net new customer wins.



We added CSLT to our Investment Ideas list as Long earlier in the week (Click Here for Note) based on the steep valuation discount to its forward growth rate and data sharing agreement with UNH setting stage for strong bookings growth in the back half of 2015.


Castlight Health (CSLT) reported Q2 2015 sales of $18.5 mill, beating consensus estimates of $17.8 mill.  Guidance for 3Q15 of 19.2-$19.5 mill (19.8 mill consensus) was a bit soft due to the implementation timing of sales to existing customers, which comprised a larger than expected portion of 1H15 bookings.  For the full year 2015, management stated they are on track to hit the mid point of their initial 2015 revenue guidance range of $74-77 mill.  With respect to profitability, subscription sales gross margin was 83.0% in 2Q15, a significant improvement compared to 69.6% in 2Q14, and supportive of management's long-term total gross margin guidance of 70-75%.


The guidance looks low, given the pattern of beats in recent quarters and our model.  Based on the short interest at 31% and deeply discounted valuation, meeting or slightly beating estimates should translate as a significant positive.


CSLT | 2Q15 Earnings | TOO SHORT AND TOO CHEAP FOR A BEAT - 2015 08 06 CSLT Guidance II



On the new business front, CSLT's 2015 bookings year-to-date have come from cross-sells, which is a positive reflection of the company's R&D efforts. 25% of customers have purchased at least 3 products, with a few signing on for 4 to 5 products. The company only signed 7 net new customers in the quarter (down from 16 customers signed in 2Q14), bringing total customers signed to 181.  Helping offset lower customer adds is a larger average deal size, with the company signing 3 Fortune 500 companies in the quarter.  


CSLT | 2Q15 Earnings | TOO SHORT AND TOO CHEAP FOR A BEAT - 2015 08 06 CSLT Customers


We attribute the year-over-year decline in net customer wins to sales force disruptions as part of a broader reorganization effort that started at the beginning of the year. However, we continue to believe that the UNH data sharing agreement sets them up nicely for net new customer wins in the seasonally strong back-half of the year.  


On the margin, management commentary on the sales effort sounded sequentially more positive on the 2Q15 call, in our view.


"Clearly on the new logo front, we saw less new logo addition than we were looking for in the first half of the year but not totally unexpected given the transition of the sales force, and we're really looking to the third quarter to accelerate customer adds and new logos. And we think we're in a good position to do that." - CFO Q3 Earnings Call



Overall, it was a forgettable quarter with no big surprises.  Attention will now turn to 3Q15, as it is typically the strongest quarter for net new customer wins.  CSLT's success in driving new bookings growth for the remainder of the year will depend on how quickly they can get trained reps out in the field and how effectively they manage the sales force transition from here.  With the stock trading at 46% discount to its sales growth rate relative to peers and 31% short interest, the hurdle is low and appears beatable.  In the short term, we are willing to look past some of the weakness and instead focus on the long-term growth opportunity ahead. 


CSLT | 2Q15 Earnings | TOO SHORT AND TOO CHEAP FOR A BEAT - 2015 07 31 CSLT Peer Valuation


Please call or e-mail with any questions.


Thomas Tobin
Managing Director 



Andrew Freedman




LEISURE LETTER (08/6/2015) - 880.HK, NCLH, RCL





August 6: 8:30am: MPEL 2Q CC ; PW: MPEL

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

August 7: 11:00am: Hedgeye Macau Call 

August 11: 4:30pm: STN 2Q CC

August 12: 7:00am: 880.HK 2Q CC 

August 13: 6:00am: G13.SI 2Q CC

August 19: 7:00am: 27.HK 2Q CC 


880.HK - SJM Holdings Ltd’s chief executive, Ambrose So Shui Fai, has called on the authorities not to ban smoking lounges from casinos in Macau.  
  • “Having smoking lounges inside casinos does not run contrary to the [government's proposed] total smoking ban,” the senior executive of the Macau gaming operator told reporters on Wednesday.  
  • Macau’s Secretary for Social Affairs and Culture, Alexis Tam Chong Weng, who oversees smoking control policies, has said several times that smoking lounges inside casinos are not completely effective in preventing non-smokers being exposed to secondhand smoke.



Paradise Co. LTD - Second quarter net profit for South Korean casino operator Paradise Co Ltd fell 47.1% YoY. Their profit was approximately KRW12.65 billion ($10.8 million) compared to approximately KRW23.93 billion in the year-prior period, the company said in a filing to the Korea Exchange on Thursday.  

  • During the reporting period, the number of “visiting days” by VIP gamblers from mainland China at Paradise Co properties fell 30.7% to 18,854 days, compared to 27,192 days in the second quarter in 2014.  
  • Paradise Co defines VIP visiting days as the daily accumulated number of high roller guests that participated in table games (excluding slot machine guests). In the second quarter 2015, mainland Chinese VIPs accounted for 44.9 percent of the 41,973 VIP visiting days recorded.
  • The rate of YoY decline in the firm’s casino revenue feel 50.2%, it said in a filing on July 6.


Takeaway: Ugly Q for Paradise, but MERS largely to blame for the slow down in visitation. 


Belle Corp. - Belle Corp, an investor at the City of Dreams Manila casino resort in the Philippines, is to raise approximately PHP1 billion ($21.9 million) by selling its remaining 47.85 million shares in Pacific Online Systems Corp to a Belle subsidiary.  In a filing on Wednesday to the Philippine Stock Exchange, Belle said it plans to use the sale proceeds “mostly for debt repayment”.


Takeaway: This sale comes at a tough time for Belle as they just reported a 50% YoY drop in net profit.  


NCLH - Norwegian Cruise Line is sending a new ship to Port Tampa Bay for next year's fall and winter cruises to the Caribbean: the Norwegian Jade.  

  • According to an announcement Wednesday, when the Norwegian Jade arrives in the Tampa Bay area in November 2016, it will sail seven- and eight-day itineraries in the Western Caribbean and 10- and 11-day cruises in the Eastern Caribbean.  
  • "We have strong demand from our guests to sail from Tampa," said Norwegian President and COO Andy Stuart in a prepared statement.



RCL -  TUI Cruises has started to promote its upcoming Asia cruises under the tagline: Book Today, Smile Tomorrow: Asia is Waiting. Sailing from Marina Bay in Singapore, Mein Schiff 1 will be offering series of alternating seven-day cruises to Malaysia, Thailand and Vietnam from November though March.  Rates start at 696 euro per person double occupancy for an inside stateroom or from 1,695 including round trip airfare from Germany. 



Chinese Business Travel Market- The campaign against corruption and slower economic growth in the mainland are curbing growth in the market for business aircraft in Greater China, consulting firm Asian Sky Group says.  

  • The firm’s annual report on business jet fleets in the Asia-Pacific region says Greater China’s fleet grew by 59 aircraft last year, having grown by 64 the year before.  
  • Reluctance to spend money caused by the mainland’s campaign against corruption and economic performance will probably keep deterring investment in business aircraft this year, the report says.


Takeaway: Growth is slowing across most metrics in China. However, per the earnings call, business travel via high speed rail is showing signs of steady growth, and leisure travel across all transportation methods is equally strong.


Macau Property Market - Centaline Macau Property Agency Ltd believes only half as many homes were sold in Macau last month as the month before, and expects the number of sales to keep falling until the end of September. 

  • Centaline director Jackey Shek Po Tak told reporters that the fall was due to buyers and sellers taking their summer holidays and to turbulence in the stock market deterring investment in housing.
  • Shek forecast no immediate decrease in prices and an increase in the fourth quarter of this year.



Singapore Jubilee Weekend - Large crowds are expected at the Marina Bay area during the Jubilee weekend between Aug 7 and 10, due to the many activities held there.  The police said in a statement on Thursday that the Float @ Marina Bay, Esplanade Waterfront Promenade, Merlion Park, Promontory, Marina Bay Sands Waterfront, Gardens by the Bay and Marina Barrage are expected to be crowded. 





California - A pilot program by the California Lottery in which gamblers can buy lottery tickets at gas pumps in the Sacramento area is being embraced by players. 

  • “Play at the Pump” lets motorists buy up to $20 worth of Quick Pick tickets when they pay with a credit or debit card at the gas pump. 
  • The program – which started about a year ago in Roseville – has spread to 86 other locations in the region and Southern California. The plan is to expand to about 100 stations. Only California and North Carolina have the option, but other states are considering it.


Takeaway: Lower gas prices and initiatives like this will continue to drive lottery sales. FY2014 was a banner year for domestic lotteries. 



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.

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USD, Oil and UST 10YR

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Signaling immediate-term TRADE overbought on both the USD Index and vs. the Euro – and another #slowing (rate of change) jobs report should be good (very short term) for everything that is correlating inversely to USD.


The most obvious oversold signal we have this morning on USD overbought is WTI – anything sub $45 looks like a cover/buy (for a trade if you’re bearish on #LateCycle jobs like the ADP numbers have been); everything from Russian stocks to the XLE and XOP signaling oversold too…


Easiest thing to do post yesterday’s bounce to lower-highs in yields is buy A) Long Term Bonds and B) stocks that look like Bonds – Utilities (XLU) and REITS (VNQ) could easily rip higher on a bad jobs report.


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation


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Company Ticker Sector Duration

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed. 


After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.


As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train. 

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Paul "Bear" Bryant


Greek unemployment came in at 25% for May, however it is 51.8% for those between 15 to 24 years old. 

More Time

“Time is what we want most, but what, alas, we use worst…”

-William Penn (1)


If only Penn – founder of what is now modern-day Pennsylvania – were alive today. Considered one of the most thoughtful, forward-thinking minds to ever grace planet earth, his works and writings partially serve as inspiration for the United States Constitution (via the “Frame of Government of Pennsylvania”), as well as the European Union (via his proposals to establish a European Parliament).


Surely he would be able to appropriately contextualize and navigate the many globally-interconnected risks associated with international trade and finance. One such key risk is the eventual advent of the Chinese yuan as a global reserve currency.


Back to the Global Macro Grind


Yesterday, the IMF proposed extending the current SDR basket by nine months until September 30, 2016.  This decision to delay any changes to the current composition of the basket is the direct result of member states’ lobbying efforts to avoid changes in the basket at the end of the calendar year to ensure continued smooth functioning of SDR-related operations.


More Time - Xi


While such operations are not necessarily worthy of mention, what we did find interesting is the IMF’s decision to NOT delay its review process of the current composition of the basket, which occurs every five years (with November 2010 being the most recent iteration). With respect to China – which has been intensely lobbying the IMF for inclusion of late – this means China’s date with destiny is going to come sooner rather than later. In fact, the review process is well underway and the results of these efforts will be revealed by year-end per IMF officials.


What does that process entail? According to the criteria for SDR inclusion (last updated in 2000), China must prove that the yuan plays a central role in the global economy. Secondly, the yuan has to be deemed “freely usable”, which means it is both “widely used” to make payments in international transactions and “widely traded” in principle exchange markets. It’s important to highlight that “freely usable” does not equal “freely convertible”; in fact, a currency can be widely used and widely traded even though it is subject to capital account restrictions (and vice versa).


As of today, the Chinese yuan is the only currency not currently in the SDR basket that meets the first criterion. Specifically, China’s exports of goods and services over the trailing 5Y period account for 11% of the world total, besting current SDR members Japan and the U.K. by 600bps and 610bps, respectively, and lagging the U.S. and Eurozone by 360bps and 820bps, respectively. This means determining whether or not the CNY is a “freely usable” currency will be at heart of this year’s discussion – the conclusion of which will determine whether or not the Chinese yuan will be granted reserve currency status in 2015.


Is the Chinese yuan “freely usable” as determined by the myriad of criteria the IMF focuses on in making this determination? Fortuitously for investors, there is no right answer. Real money is made by betting on the improbable becoming probable.


With respect to the previous question, on one hand, the CNY pales in comparison to the USD, EUR, JPY and GBP in terms of being “widely used” and “widely traded”. On the other hand, the rate-of-change across each of the following metrics suggests the yuan’s importance as an international currency has dramatically increased since the last SDR review and that this increasing importance should be considered a sustainable development.


The data presented below is in terms of share of global totals:


  • Official Foreign Currency Assets: CNY = 1.1% in 2014, up from 0.7% in 2013. This compares to 63.7%, 21%, 4.1% and 3.4%, respectively, for the USD, EUR, GBP and JPY in 2014.
  • International Banking Liabilities: CNY = 1.9% to 4.0% (depending on classification) in 2014. This compares to 52.1%, 29.7%, 5.4% and 2.8%, respectively, for the USD, EUR, GBP and JPY in 2014.
  • International Debt Securities Outstanding: CNY = 0.6% in 1Q15, up from 0.1% in 1Q10. This compares to 43.1%, 38.5%, 9.6% and 2.0%, respectively, for the USD, EUR, GBP and JPY in 2014.
  • Issuance of International Debt Securities: CNY = 1.4% in 2014, up from 0.1% in 2010. This compares to 42.1%, 37.1%, 11.6% and 1.8%, respectively, for the USD, EUR, GBP and JPY in 2014.
  • Cross-Border Settlement: CNY = 1.0% in the four quarters ended 1Q15, up from 0.2% in the four quarters ended 1Q13. This compares to 41.6%, 36.6%, 4.3% and 3.3%, respectively, for the USD, EUR, GBP and JPY in the four quarters ended 1Q15.
  • Trade Finance (Letters of Credit): CNY = 3.9% in the four quarters ended 1Q15, up from 1.9% in the four quarters ended 1Q13. This compares to 85.6%, 7.2%, 0.2% and 1.9%, respectively, for the USD, EUR, GBP and JPY in the four quarters ended 1Q15.
  • Foreign Exchange Market Turnover: CNY = 1.1% in 2013 (the latest available annual data), up from 0.4% in 2010. This compares to 43.5%, 16.7%, 5.9% and 11.5%, respectively, for the USD, EUR, GBP and JPY in 2014.


This we do know: the burning desire for reserve currency status among Chinese authorities has perpetuated a dramatic increase in both the speed and scope of capital account and capital markets reform in China, including:


  • Increasing the participation of foreign central banks and institutional investors in Chinese capital markets;
  • Granting foreign entities greater freedom to issue yuan-denominated debt and/or raise equity capital in China;
  • Granting domestic entities greater freedom to issue foreign currency-denominated debt and/or raise equity capital abroad;
  • Further promoting the use of the yuan for international trade and settlement; and
  • Liberalizing interest rates.


With respect to the aforementioned reforms:


  • As of May, the PBoC has allowed 152 foreign institutional investors access to China’s $6.1T interbank bond market (far and away its largest and most critical), an increase of 34 entities in the YTD.
  • As of 2Q14, foreign entities held a mere 1.9% of China’s general government gross debt securities, which is far and away the lowest share of foreign participation among the 24 emerging market economies tracked by the IMF and compares to a sample average of 35.3%. This compares to an even lowlier 1.1% of foreign participation in mainland equities.
  • The current 870B yuan quota for China’s Renminbi Qualified Foreign Institutional Investor program (RQFII) – which allows international investors to purchase Chinese stocks and bonds with yuan raised offshore – accounts for a mere 2.9% of China’s general government gross debt outstanding and 2.1% of mainland equity market cap.
  • Chinese individuals can only move a maximum of $50,000 per year out of the country, effectively limiting their investment options to cash, CNY bank deposits, domestic debt and equity securities, property and physical gold. Moreover, China’s stock of narrow and broad money is extremely significant as a share of world totals at 19.8% and 24.9%, respectively. For companies, overseas securities investment is currently capped at $300 million.
  • The proportion of China’s trade that was settled in yuan has risen from 0.02% in 2009 to nearly 25% in 2014. Moreover, there are now 15 offshore clearing centers for the yuan around the world. Additionally, over 20 foreign central banks have signed currency swap agreements with the PBoC totaling about $430B.
  • A key hurdle for interest rate liberalization in China was surmounted in May when the PBoC introduced a deposit insurance program that will fully cover deposits up to 500,000 CNY. This effectively shields Chinese households, on the margin, from any fallout resulting from increased competition for deposits that would naturally occur as a function of removing the deposit rate ceiling and follows efforts in 2013 to meaningfully lower the floor for lending rates. China currently has $19.7T in bank deposits.


In short, there are two primary reasons Chinese officials are so desperately seeking reserve currency status for the yuan:


  1. International portfolio rebalancing among institutional investors is likely to be overwhelmingly unidirectional. Specifically, the preponderance of capital will likely flow to China in lieu of other lower-yielding reserve currencies, at the margins. We discuss these dynamics in greater detail on slide 72 of our recent presentation titled, “Is Consensus Right On China?”. Such asset allocation adjustments will help offset the recent dramatic acceleration of capital outflows (read: the reversal of “hot money” flows) from the mainland, which accelerated to a record TTM sum of $510B as of June. Refer to slides 35-38 of the aforementioned presentation for more details.
  2. It would help China secure another major victory in its ongoing battle versus the U.S. for economic and political clout. Investors, politicians and businesspeople the world over who “know China” understand very well that Chinese officials are displeased with the current state of global affairs where the U.S. is the primary hegemonic power. Achieving reserve currency status would be the latest triumph in an increasingly impressive list of “wins” in the YTD, including securing support from key U.S. allies for the Beijing-led Asian Infrastructure Investment Bank (AIIB), as well as for the very topic we are discussing – reserve currency status. In fact, in spite of the recent spate of heavy-handed policy intervention in mainland equity markets, the IMF recently affirmed its support for the yuan’s inclusion into the SDR basket; it’s merely a matter of when, not if. Additionally, the IMF has taken an opposing stance to the U.S. Department of the Treasury by recently deeming the yuan to no longer be “undervalued”.


All told, we can’t stress enough how impactful China’s capital account reform measures will be to the global economy. While the reform drive will no doubt continue to be piecemeal and full of incremental quotas (Chinese officials credit the country’s closed capital account with shielding the mainland economy from the 1997-98 Asian Financial Crisis and the 2008-09 Global Financial Crisis), meaningful progress will be achieved sooner than many investors may assume.


Whether it happens in 2015 or 2020 (the U.S.’s vote could make or break China’s bid), achieving reserve currency status for the yuan is not the end game. Rather, it’s simply the beginning of a long-lasting series of tectonic shifts in and across the global economy and the financial markets that underpin it.


Is your portfolio appropriately positioned for these changes?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.29% (bearish)

SPX 2068-2119 (bearish)
VIX 11.88-15.24 (bullish)
USD 97.04-98.44 (bullish)
EUR/USD 1.08-1.10 (bearish)
YEN 123.34-124.99 (bearish)

Oil (WTI) 44.36-47.12 (bearish)

Gold 1075-1101 (bearish)


Keep your head on a swivel,




Darius Dale



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