The following is a post written by our Hedgeye Financials team, led by Josh Steiner, on the impact of QE2 on consumer spending through 2011.  The analysis shows that the modest impact on consumer spending resulting from QE2 may not be worth the significant opportunity cost (for savers) associated with longer term rates.


When $2 Trillion Buys You $3 Billion

We think it's conventional wisdom that when long-term rates are low it drives high volumes of refinancing activity, which puts significant incremental disposable income back into consumers' pockets. While this was true back in 2003, we think investors will be surprised to find out just how little it will add this time around, especially when comparing 2011 to 2010.


Low Long-Term Rates (i.e. Refinancing) Are Not the Elixir the Market Thinks They Are

In the table below we've mapped out precisely how much additional money consumers will have from refinancing opportunities. We've used MBA estimates, which, to be fair, have generally overestimated activity in the past. The takeaway is that based on their estimates for refinancing volume over the remainder of this year and throughout next year, we expect a very modest increase in disposable personal income of $5.9 billion in 2010 (roughly 4 bps of GDP) and an even more modest boost of $3.1 billion (2 bps) for 2011.


Considering that QE2's only direct stimulative property for consumers is in boosting the housing market and consumer spending through refinancing activity, we were somewhat surprised to see just how paltry the benefit would be ($3 billion) especially when juxtaposed against the rumored cost of QE2 (~$500 billion to $2 trillion).


For those who think the MBA's rate forecasts and commensurate refi volume assumptions are overly conservative in light of the rumored scale and scope of QE2, consider that in 2010 mortgage rates fell 40 bps and drove only $6 billion in incremental disposable income. If we assume that 2011 sees mortgage rates fall another 40 bps, averaging 4.3% for the whole year, this would drive roughly $6 billion in further disposable income, only $3 billion higher than our $3.1 billion estimate. In other words, we just don't see how QE2 can drive enough incremental spending power to either move the needle on GDP or justify the profound cost.



Our Methodology

We've used MBA forecasts for refi volume and 30-year mortgage rates, and we've even used their home price assumptions (basically flat), which are in sharp contrast to our own (down). Based on this, we show there being 2.2 million mortgages being refinanced in 2011, down from 5.5 million in 2010 leading to a total annual payment reduction of $3.1 billion in 2011, down sequentially from the $5.9 billion boost it gave to 2010. We've assumed, based on Freddie Mac data, that, on average, people save 90 bps on their rate when they refinance. We've also assumed that everyone is in a 30-year fixed rate mortgage and that everyone is refinancing at 80% LTV.


It's worth pointing out that there is a not immaterial opportunity cost associated with lower long-term rates. Namely, the savers in this country are earning lower returns on their deposits. While it's difficult to quantify precisely what this opportunity cost is, we estimate that it is in the billions of dollars and likely exceeds any aggregate savings from refinancing activity.


We recognize that the goals of QE2 are twofold: to inflate asset prices by crowding out whatever asset class the Fed decides to monopolize for the next 6-24 months and to transfer lower borrowing costs to the consumer. The point of this note is to call out how small the actual transfer will be.


The new CoD show may or not be a success but MPEL’s turnaround has been impressive. However, the catalysts we’ve been waiting for are already on the table and this one may take a breather.



The MPEL thesis was two pronged:  strong market share gains punctuated by a strong bottom line quarter – finally.  MPEL certainly delivered.  Street estimates still need to go up.  To be fair, although we knew hold percentage would be high, it did come in above what we were looking for, so some of this upside may not be sustainable.  We may want to keep a trade a trade.  Here are some takeaways from the quarter:


CoD net revenues were $7MM above our estimate while EBITDA was $9.6MM better

  • We know that the company said that direct play was 20% but we think it was actually a little north of 13% with the addition of 3 more junket rooms in the quarter.
  • VIP gross table win was $7MM above our estimate
    • RC was actually $600MM less than our estimate, but hold was 20bps higher as a result – which also helped margins even more since 50% of their junkets are paid on a fixed % of RC
    • At a normal 2.85%, net revenues would have been about $76MM lower and EBITDA would have been about $83MM (about $32MM lower than reported results)
  • Mass win was $1.5MM higher than our estimate, with drop $22MM lower but hold rate 1.3% better
  • Slot win was $5MM light
  • Non-gaming revenues net of promotions were $2MM below our estimate
  • Fixed costs were $5MM below our estimate and were essentially flat to last Q at $55MM.

Altira net revenues came in $10MM below our estimate although EBITDA came in $8MM above

  • RC was $100MM better than we modeled, which we attribute to a small increase in direct play which is also why the reported hold of 2.7% was 10bps below our estimate.
  • VIP gross win was $7MM below our estimate
  • Mass win was $500k better than we estimated
  • Non gaming revenues, net of promotional expenses were $2MM above our estimate
  • The real story seems to be lower junket commissions and controlled fixed costs.  All-in, junket commissions were $9.5MM below our estimate while fixed expenses look to be only $15MM

Other stuff:

  • Mocha Slots was $0.7MM ahead on revenue and $0.6MM ahead on EBITDA
  • D&A was $3MM below our estimate
  • Pre-opening expense was $5MM higher but it looks like they took it all in the Q vs. over the next 2 Qs
  • Interest expense was $8MM higher




They finally beat and it was a blockbuster. No buying of business here. Margins were great. Here is the transcript of the conference call.


"We are pleased to report record net revenue and record Adjusted EBITDA during the third quarter of 2010. These milestones are driven by continued progress in expanding our mass market gaming volumes and by further success in our already robust VIP business, along with a favorable rolling chip hold percentage in the third quarter of 2010."

- Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment



  • CoD: Net revenues of $504MM and Adjusted EBITDA of $115MM
    • "Year-over-year improvements in both net revenue and Adjusted EBITDA were driven by increased rolling chip volume, an improved mass market win rate, and higher mass market table games drop"
    • Hold was 3.4%
  • Altira: Net revenue of $186.8MM and Adjusted EBITDA of $28.8MM
    • Hold was 2.7%


  • Feel like the operating team has begun to gel and that they can now start producing more consistent results
  • They are gaining market share
  • VIP benefited from 3 new junket rooms at CoD
  • The House of Dancing Water show is sold out through the end of the month; HDW is helping drive increased visitation to the property.
  • Mass market drop per day increased 35% YoY
  • The improvement in their Mass market hold is sustainable as they are providing a better guest experience and people are staying and playing longer
  • Have 450,000 members in their database and hope to hit 500,000 by year end
  • Organizational restructuring that they announced on September 1st is already helping them improve results
  • Will continue to look to improve margins as their mix of Mass increases
  • 4th quarter is off to a good start with record business levels in October
  • Non-operating 4Q guidance
    • $84MM of D&A
    • Interest expense: $29MM
    • No pre-opening or capitalized interest


  • 2012/early 2013 Ferry Terminal Pac On opening
  • No Singapore impact
  • Focus over next 12 months is on improving existing operations
  • They are interested in Macau Studio City if it ever opens - their management contract still stands
  • They are also quietly looking at other opportunities in Asia
  • CoD increasing VIP rooms. They have some extension plans on the second floors. Hopefully they will add another 2-3 junket operators in by Chinese New Year.
  • More likely than not, they will only have a hotel, not an "apartment hotel." Once their occupancy and ADR ramps up, they can decide whether to build the additional tower on the land they have.
  • EBITDA normalized for 2.85% would have been just north of $100MM
  • House of Dancing Water cost is just over $100,000/day
  • FCF in the Q was just over $100MM
  • They believe that the Galaxy opening will move the center of gravity in Macau to Cotai and will be good for them
  • Claim that premium direct volume was still in the 20% range, but we believe it was around 13% based on our proprietary database
  • No change in the junket commission environment for them
  • CoD - 50% turnover based commission, at Altira - the majority are on a turnover basis (ie 1.25% vs. Rev Share)
  • 165 VIP tables and 240 Mass tables at CoD
  • Want to cross market Altira and CoD. They will try to have some premium direct at Altira
    • I also see a small increase of direct VIP play at Altira this Q to 2%
  • Have done some work on Japan and Taiwan and are interested.
  • There are Taiwanese elections coming up - so anything that happens on the islands would occur after that


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Compliance: Vic or Treat

Put simply, the new rules don’t create a wide enough net.

-         Vikram Pandit


Just because Vikram Pandit says something, doesn’t mean it’s wrong. 



Compliance: Vic or Treat - Vikram Pandit



We were spooked as we saw the entire world financial system going down the tubes.  America had fomented a housing disaster.  The traditional Manufacture and Distribute model of American finance had found a golden egg-laying goose, courtesy of our elected officials who, outdoing our Third World brothers and sisters, promised Americans not merely a chicken in every pot, but a kitchen to house the pot, and a four bedroom house – complete with two-car garage, trash compacter and satellite dish (in-ground pool optional) – to surround it.  Americans of every stripe – from the criminal, to the gullible, to the hard-working hopeful Believers in the Dream – lined up clutching their worn bank deposit books and three years’ worth of tax returns to get their piece of the American pie. 


Never mind that most Americans realized they were going to have to uphold their end of the bargain by staying employed, putting in an honest day’s work for an honest day’s pay.  If, as our Hedgeye watchword has it, everything important happens at the margin, the margin of homeowner finance soon swelled like a rampant tumor.  Fraudulent financings became increasingly the order of the day as bankers and their administrative minions actually coached people on how to lie on their mortgage applications.  We get that there are gullible, vulnerable and dishonest people out there who leapt at the chance to get something for nothing.  And there is likely a significant number of failed homeowners who allowed themselves to believe that lying on your mortgage app is like cheating on your taxes: everyone does it, no one is hurt by it.  I can get away with it.


For a moment it looked like the banks were actually the Greater Fools, about to be brought low by their own greed.  What a relief, then, when Secretary Paulson stepped in and spread our cash over the crisis like oil upon the waters.  We were wrong.  The homeowners did get flushed away like so many troublesome small turds.  The banks were made whole, and then some, and it was, after all, we who were the Greater Fool of Last Resort.


Speaking at a conference sponsored by The Economist magazine, Pandit said the legislative changes to date could give rise to a new shadow banking system.  “Could,” Mr. Pandit?  Nay, must.  Quoth the Pandit, “Any time the amount of capital required by regulation exceeds the levels judged necessary by the market, opportunities for arbitrage arise.”  Pandit is noting something a fact approximately as obvious, and as rarely remarked upon, as the sun’s rising in the East.  And he made the useful distinction that “the banking system is not synonymous with the financial system as a whole – and Basel only affects the former.” 


As always, the money has done all the talking, though we are not sure exactly who has done its bidding.  Dodd-Frankenstein, as observed by NY Times chief financial correspondent Floyd Norris ( 25 October, “Return of the Shadow”) “does give regulators authority to oversee the next AIG – a huge financial institution that is systemically important even if it is not fully in the conventional regulatory system.”  However, observes Norris, “Congress rejected proposals to let regulators go after shadow sectors,” those being precisely the marginal areas of activity that will take up the slack.  As our neighbor’s bumper sticker reads: “If they outlaw guns, then only outlaws will carry guns.”  And you can bet that if they outlaw mortgage-backed CDS… well, you get the idea.


We are intrigued that Pandit is so afraid of this that he felt the need to speak about it in a public forum.  We are not sure whether he is saying it prophylactically, to prevent being taken to task next time the banking system implodes, or as a way of marking his territory and calling for pre-emptive regulatory approval of his future actions at the helm of Citi.


One thing, though.  He’s got it right.  The regulated banks played with a will into the morass of the unregulated marketplace, extending lines of finance and credit far beyond what the foreshortened horizon of their own regulations permitted them to see.  It is, of course, a fallacy to say that there was not already sufficient regulation in place to prevent the latest disaster.  There was, rather, a lack of will on the part of the regulated marketplace to exercise the caution and diligence required of them by their fiduciary brief.  The fact remains that no bank analyst – and no analyst from the rating agencies – ever visited any of the vast housing developments that were being sold off like hotcakes, all on no-documentation mortgages.  The banks rolled up these same mortgages and sold them to overseas investors, to Orange County – indeed, to one another, and even to other divisions within their own entity. 


One obvious answer is for Congress to force regulators to drop an iron curtain between regulated and unregulated activities, allowing the unregulated market to bear all the risk – with the recognition that they will also reap the profit, while the banks continue to plod along.  For our money – and in your Humble Scrivener’s case, Mr. Pandit has most of it in his tottering institution – plodding is just fine.


But it’s not just fine for the shareholders.  Despite Jack Welch’s recent disavowal of Shareholder Value as “the stupidest idea” to come along in years, bank executives want their institutions to prosper because Dodd-Frankenstein does nothing to undercut Wall Street’s compensation model.  The problem is, as far as the regulated banking system is concerned, there’s no such thing as safe sex.  As has been observed again and again, that first dip into the unregulated world creates instant addiction.  And, like the addict who sells his grandmother’s jewelry and clock radio, the banks will stop at nothing once they are hooked.


On the other hand, we recognize that it is in the unregulated world that all the truly creative ideas are hatched.  Let the word “unregulated” be divorced in the public mind from the word “criminal.”  Indeed, by definition it is easier to violate the rules in a market that has many, than in a venue where there are none.  If this seems cynical, please recognize that many of the greatest advances in all areas of human endeavor have come from outsiders working on their own, and often against the opposition of the institutionalized mainstream.  We need only point to examples such as Galileo and Darwin.  Or if you prefer, Moses, Jesus and Mohammed.  You get the point.


Far from holding the regulated and unregulated markets apart from one another, Dodd-Frankenstein appears to leave the door wide open for the next round of Minskian boom and bust as these two incompatible species attempt once again to produce viable offspring.  Many in our industry gaze despairingly on the micro-meddling going on in Washington and wish the Austrian school of economic theory had more influence in our system, with its notion that “creative destruction” creates fecund soil from which future economic success will sprout.  Does no one in government have the moral courage to stand by and allow significant economic failure to ensue?  If you want destruction, we remind you there is at least one Austrian in government in this land: Arnold Schwarzenegger.


Moshe Silver

Chief Compliance Officer


TODAY’S S&P 500 SET-UP - November 2, 2010

As we look at today’s set up for the S&P 500, the range is 9 points or -0.54% downside to 1178 and 0.22% upside to 1187.  The futures are higher as the Republicans are poised to retake the House and narrow Democrats’ margin in the Senate. 


Earnings today are reported by companies including Emerson Electric, Pfizer, MasterCard and Kellogg.

  • Anadarko Petroleum (APC) 3Q adj. EPS missed est. 
  • Cognex (CGNXS) sees 4Q rev. above est.
  • Corporate Executive Board (EXBD) 3Q adj. EPS beat est.; raised  full-year forecast
  • Ironwood Pharmaceuticals (IRWD), Forest Laboratories (FRX) companies reported positive results from Phase III trial of linaclotide 
  • MEMC Electronic Materials (WFR) 3Q adj. EPS, rev. missed ests, suspended 4Q forecast
  • NutriSystem (NTRI) raised 2010 EPS forecast 
  • RightNow Technologies (RNOW) raised year sales, profit forecast *Rogers (ROG US) 3Q EPS missed est.


  • One day: Dow +0.06%, S&P +0.09%, Nasdaq (0.10%), Russell (0.68%)
  • Month-to-date: Dow +0.06%, S&P +0.09%, Nasdaq (0.1%), Russell (0.68%)
  • Quarter-to-date: Dow +3.12%, S&P +3.78%, Nasdaq +5.75%, Russell +3.32%
  • Year-to-date: Dow +6.68%, S&P +6.21%, Nasdaq +10.39%, Russell +11.7%
  • Sector Performance: Energy +0.12%, Technology +0.08, Financial, +0.01, Industrials 0.00%, Healthcare 0.00%, Materials (0.06%), Consumer Discretionary (0.20%), Consumer Staples (0.42%), and Utilities (0.98%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Baker Hughes +4.40%, Cabot Oil & Gas +4.07% and M&T Bank +3.64%/First Horizon -6.74%, Marshall & Ilsley -4.57% and Avon -4.56%.


  • ADVANCE/DECLINE LINE: 146 (-428)  
  • VOLUME: NYSE: 959.57 (-7.39%)
  • VIX: 21.83 +2.97% - YTD PERFORMANCE: (+0.69%) - THE VIX IS UP FOR THE LAST 6 DAYS
  • SPX PUT/CALL RATIO: 2.57 from 3.37 -23.66%  


  • TED SPREAD: 16.73 -1.725 (-9.347%)
  • 3-MONTH T-BILL YIELD: 0.13% +0.01%    
  • YIELD CURVE: 2.32 from 2.32


  • CRB: 301.53 +0.29%
  • Oil: 82.95 +1.87% - BULLISH
  • COPPER: 378.50 +1.38% - BULLISH
  • GOLD: 1,352.68 -0.37% - BULLISH


  • EURO: 1.3901 -0.33% - BULLISH
  • DOLLAR: 77.296 +0.04%  - BASING



European markets:

  • FTSE 100: +0.90%; DAX: +0.44%; CAC 40: +0.30%
  • European markets are trading higher, having quickly reversed slight opening falls that saw CAC down (0.3%) and FTSE100, DAX (0.1%).
  • Continuing M&A activity and generally well received results from European heavy-weights, particularly in the UK, was countered by caution ahead of the US Federal Reserve policy decision on Wednesday and additional capital raisings announcements by banks.
  • Advancing sectors lead decliners 5-4, with banks and utilities amongst the leading fallers, travel & leisure and personal & household products the leading gainers.
  • France Oct final Manufacturing PMI 55.2 vs preliminary 55.2
  • Germany Oct final Manufacturing PMI 56.6 vs preliminary 56.1
  • EuroZone Oct final Manufacturing PMI 54.6 vs preliminary 54.1

Asian markets: 

  • Nikkei +0.06%; Hang Seng +0.1%; Shanghai Composite (0.28%)
  • Asian markets traded in a tight band today, with many investors choosing to stay out of action ahead of today’s Federal Open Market Committee meeting.
  •  A surprise decision to raise interest rates in Australia pushed regional markets down in the early afternoon, though most recovered before closing. Australia raises cash rate 25bp to 4.75%.
  • India raised interest rates for a sixth time this year, hiking the Repo Rate and the Reverse Repo Rate by 25bps each.
  • China ended down slightly, as investors sold financials and carmakers. 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, November 2nd, 2010



During The Japan Academy of Gambling and Gaming Studies panel discussion,  panelists said no decision has been made on the Casino Act submission date to the Diet, any taxation plans, and potential destinations.  Hakubun Shimomura, congressional representative for the Liberal Democratic Party, and Kazuaki Sasaki, assistant professor at Nihon University College of Economics, believe casino taxation in Japan will be similar to that of S'pore's--low in the beginning and higher later.  Issey Koga, congressional representative for the Democratic Party of Japan, reiterated his hope to submit the draft by the next Diet session.  “We were targeting our draft law to be submitted by now last year and it didn’t happen,” Koga said. “I’m hoping we’ll be able to push the draft law through by next year.” 


Michael Hands of Penn National, stressed PENN's primary interest in the prefecture of Kyushu, particularly Fukuoka--its  capital city, but he said that the tabling of a bill during the next session would be the signal for various regions to get organized, select locations, create concepts and create consensus.  Matt Maddox, CFO of WYNN, said if WYNN builds a casino in Japan, it will be "very unique."  Ten casino operators including Harrah’s Entertainment, Penn Gaming, and MGM Resorts International have expressed interest in Japan.



IM thinks MGM may not be buying market share as aggressively as people think.  IM said the mass floors at MGM were busier than WYNN's and the new incentives for the VIP rooms are not "as outlandish as" what Adelson claimed.

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