In preparation for MPEL's Q4 earnings release Tuesday morning, we’ve put together the pertinent forward looking commentary from MPEL’s Q3 earnings call.




  • “As we’ve said in the past, the improvement in our mass market whole percentage is intangible, sustainable, and reflects operational improvements in our business. The improvement indicates that we are providing a better experience for our customers, and they are staying longer at our tables as a result. We believe our mass market hold percentage at City of Dreams will remain between 20% and 22% going forward, with the bulk of our mass market gains coming mainly from increased volumes.”
  • “Looking forward, we expect our growth at City of Dreams to come from a combination of the introduction of new amenities over the next few quarters, and from tactical initiatives designed and implemented by the new management team. These include leveraging The House of Dancing Water in our marketing campaign and broadening our geographic reach into China, as well as into the Asia-Pacific region. We’re also improving our relationships with tour group operators and asking companies in China to help us to drive more traffic through the property at attractive customer acquisition cost.”
  • “Looking forward, we expect to continue to participate in the growth of the growing chip market in Macau, while maintaining our disciplined approach to junket pricing and avoiding unsustainable commissions.”
  • “More specifically, fourth quarter got off to a good start, with the business generating record monthly levels of consolidated rolling chip volume, mass table drop and mass win in the month of October. Standalone, City of Dreams is also hitting new records on each of these operating metrics. From a balance sheet perspective, our first financial covenant test commences with our 4Q results and we remain comfortable with our ability to meet these tests.”
  • [4Q] “Depreciation and amortization cost is expected to be approximately 84 million, which reflects a full quarter of depreciation from The House of Dancing Water. Net interest expense in the fourth quarter is expected to be approximately 29 million. We do not expect any pre-opening expense or capitalized interest for the fourth quarter.”
  • [Singapore impact] “And as we predicted, I think Singapore took some of the Southeast Asian VIP business, because from a geographical and traveling standpoint it’s just a lot easier and a lot closer to go there. But I think with the amount of quality resorts and hotel in Macau right now, Macau has its own appeal. So, I think at 60% year-on-year growth, there’s been very little impact.”
  • “Over the medium to longer term and beyond Macau in some of the major jurisdictions like Japan and Taiwan, we have quietly done some study trips and some lobbying work. So, we will continue to keep an eye on those markets as well.”
  • “And the expansion area will be around 20 tables. Hopefully, we will be bringing two to three junket operators before Chinese New Year, that’s the plan.”
  • [Unused land adjacent to CoD] “I think more likely than not it is probably going to be a hotel tower.”
  • “So, I think when sites five and six and Galaxy opens up, that will certainly appeal to their visitors, and will certainly draw some traffic into our property.”
  • [Junket market] “So, we’ve stuck very firm on our pricing since over a year ago, and also, on credit support as well. So, I think if you look at some of our receivable is actually going down.”
  • “In terms of Altira, the majority of junkets on the turnover basis.”
  • “In COD, the revenue share and turnover basis ratio is 50-50.”

The Week Ahead

The Economic Data calendar for the week of the 21st of February through the 25th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - jj1

The Week Ahead - jj2

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Exhausted? SP500 Levels, Refreshed

POSITION: no position in SPY


Exhausted yet? I know the US stock market bears are exhausted with the bulls who sold at the exhausted March 2009 lows. As you can see in the chart below, that was 98% lower. The “flows” argument notwithstanding, US Equity market volume, breadth, and volatility readings finally look exhausted too.


Here’s another way to look at the exhaustion of immediate-term TRADE and intermediate-term TREND price momentum:

  1. Immediate term TRADE’s 3 standard deviation overbought line = 1340
  2. Intermediate term TREND’s 3 standard deviation overbought line = 1346

Interestingly, these lines are converging around the same price level. That multi-duration price momentum factor combined with an immediate-term TRADE breakout this week in volatility (VIX) and continued deterioration in our TREND duration volume studies has me exhausted looking at this.


What could go wrong from here to inspire a garden variety mean reversion correction of -7.7% to 1242 over the intermediate-term? Away from a potential crisis in US bond and currency market prices, probably nothing …


I guess the positive news for the bears who had it in them to short today’s highs in the SP500 (I haven’t yet), is that next week doesn’t have a merger Monday. Feels like a February in 2008.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Exhausted? SP500 Levels, Refreshed - S P 021810

Civil Unrest In . . . Wisconsin?

Conclusion: We may be seeing the early stages of union busting in Wisconsin, which, if successful, could be a marginal positive for the municipal bond market.


Position: Covered our short position in the etf MUB on 2/16 in the Hedgeye Virtual Portfolio


The last couple of days have seen large scale protests on the Capitol in Wisconsin.  As much as they are likely disgruntled, Wisconsin natives aren’t protesting the fact that Yale (the alma mater of Keith and myself) is ranked ahead of the University of Wisconsin in Division 1 hockey.  Rather these are protests by government unions, in large part teachers, who are upset with the deficit cutting proposals currently set forth by Governor Walker to limit the ability of many public employees to negotiate their contracts on a go-forward basis. In effect, this would end 50-years of collective bargaining rights.


Governor Walker’s proposals are seen as aggressive by many on the left and, in fact, being called union busting tactics by much of the prominent union leadership in Wisconsin.  The key proposals include:


-          All public employees will be required to contribute 5.6% of their pay to their pensions (much more than now);

-          All public employees will be required to pay 12.6% of healthcare premiums, up from 6% now;

-          Public employees will only be able to negotiate pay raises that are on par with annual increases in CPI;

-          Contracts will be established with a duration of one year; and

-          Union fees will become optional and each year public employees will have the right to vote via a secret ballot to decide whether they want to stay in the union.


While the Republicans currently hold a majority in the Wisconsin Senate, with 19 seats of the 33 seat house, they are actually one short of a quorum needed to conduct business.  So, while the debate on Governor Walker’s bill was set to begin yesterday, the Democratic caucus responded by, literally, leaving town.  In fact, according to Democratic State Senator Jon Erpenbach, the Democratic State Senators had actually all left Wisconsin and assembled in Rockford, Illinois.  According to Erpenbach:


“The plan is to try and slow this down because it's an extreme piece of legislation that's tearing this state apart.”


No doubt leaving Wisconsin and refusing to debate is a sure fire slow down tactic, albeit a theatrical one.  Despite these theatrics in Wisconsin, the reality remains that heading into fiscal 2012, which starts for most States on July 1, 2011, States are collectively facing a ~$134BN budget deficit.   


In the past couple of fiscal years, the stimulus program has paid almost $200BN to the States, which has allowed them to fund their budget gaps.  As such, which we outline in the chart below, we have seen a very limited drop off in State and local government employment over the past three years compared to the dramatic drop off in private employment.  No doubt, this is set to change and change dramatically in the coming quarters as State governments will be forced to make cuts. According to some studies, employment costs are as much as 50% of State budget expenses, so it is likely that the battle we are seeing in Wisconsin spreads nationwide.


Civil Unrest In . . . Wisconsin? - djchart


The extent to which these new plans can be passed will be a function of the strength of the unions, and the extent to which they are willing to battle.  Over the course of the past 40 years the unionization of State and local governments has gone up dramatically, while unionization in the private sector has declined steadily.  Currently, more than 1/3 of these employees are unionized.  So, this lobby is large and motivated.


We called this out in our Q1 Theme Presentation, but the risk of these large and well organized unions is that they delay much needed fiscal reform.  Only time will tell the extent to which unions can impeded these fiscal reforms, but the gauntlet is being thrown down as highlighted by some recent quotes:


-          Randy Weingarten, president of the 1.5 million-member American Federation of Teachers (January, 2011):


“ Governor Christie’s vilification of teachers and their unions is a cloak for all of the cuts that have been or about to be visited upon public education.”


-          Gerald McEntee, President of the American Federation of State, County, and Municipal Employees (January 19, 2011):


“The stakes have never been higher… We’ll be running ground operations, hitting the airwaves and taking on the forces allied against us.”


The battle lines have been drawn and the future of fiscal reform at the State and local level is in the crosshairs.  But the reality remains, fiscal deficits loom and perhaps Governor Walker of Wisconsin summed it up best in a recent article in the New York Times:


“I’m just trying to balance my budget. To those who say why didn’t I negotiate on this? I don’t have anything to negotiate with. We don’t have anything to give. Like practically every other state in the country, we’re broke. And it’s time to pay up.”




Daryl G. Jones

Managing Director

Shorting VFC Again

Yeah...we know...VFC is one of the best managed companies in this industry. But one thing the company cannot manage is the share price. With a 10.8% move off the 1/28 near-term bottom, Keith got yet another shot at this one in the Hedgeye Portfolio,



Here’s our sense on VFC over three different durations:


Long-term:  It’s hard for anyone to call VFC a bad company. This is not management’s first rodeo. They are pretty darn good at making the right business decisions to manage their portfolio, and then managing expectations accordingly.

The fact of the matter is that over the course of 10 years, VFC has…

  • transformed from a vertically owned/operated capital intensive commodity-based apparel company (ie…underwear, denim) to an outsourced and offshored  portfolio of lifestyle brands that carry significant weight the consumer (ie The North Face, Vans). 
  • printed a growth algorithm of 3-5% sales, 5-6% EBIT, and 9-10% EPS. When you layer on the fact that almost all of the incremental growth came from less capital intensive businesses, we see that RNOA went from 9% to 16% over that same period. That’s not half bad. In fact, it’s clearly above average relative to peers.


I’d argue that we’re at the point of the ROI decision tree where the business will slow organically at the same time we’re seeing severe cost inflation -- -and that’s exactly when VFC will step on the accelerator with acquisitions. We’re already modeling stock repo in our model, so we may have to redistribute the cash to above the line if a deal happens. We also will not give the company a free pass that any deal will be a good one. The industry is at peak margins right now, and valuations do not represent that. VFC knows how to vet a deal, and even they have had their share of disasters (7 for All Mankind). Also, let's not forget that this company's long-term transformation happened when the industry had the biggest milti-year tailwind that it experienced -- ever. 



Intermediate Term

  • Ultimately, with such a diverse portfolio of brands, consumers and channels of distribution, VFC is really a double edged sword. The mix protects them from some downside, but it precludes the company from fully capturing upside in the event of a rebound.
  • In the end, it’s hard to outperform the industry meaningfully when you ARE the industry. Unfortunately, 2011 will be a dark dark year for the apparel industry in the US. VFC may well be able to steer its pricing and inventories better than most, but the biggest risk is what they can’t predict – which is the irrational behavior on the part of competitors as margin is literally sucked out of the supply chain.
  • Bottom line – numbers need to come down for 2011. The Street is at $6.80 for next year vs. $6.30 in 2010. The $6.30 is very doable this year, but this company should consider itself lucky to earn that level again in 2011. Numbers are off by $0.50.



Short Term

  • 4Q10 is the last ‘easy quarter’ revenue and margin compares – which is largely due to growth in company retail (2x the usual revenue recognition) and strength in TNF.
  • This is going to come down to earnings catalysts.
  • Will VFC ‘lower the boom’? on its conference call in a few weeks? I think that there’s a 75% chance of some official guide down, and 25% chance of a BIG one (ie calling for a flat year).
  • Is it in the stock already? With an EBITDA multiple of 8.6x, my vote is No. RL is trading at the same multiple – but the difference is that the Street is LOW by 15% on RL.

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