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Your Problem

This note was originally published at 8am on March 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dollar is our currency, but it’s your problem.”

-John Connally

 

That’s an interesting way to look at the world’s reserve currency; particularly if you’re the United States Treasury Secretary. That’s where John Connally Jr. found himself for a very short period of time (1971-1972). Hedgeye economic history does not remember him or Richard Nixon’s political strategy to devalue the dollar well.

 

In the end, I don’t think history will remember US Treasury Secretaries Hank Paulson or Tim Geithner well either. At least not when considering them alongside this critical score. All pleasantries associated with how they say they saved us from the crisis they helped create aside, the price in the US Dollar Index chart doesn’t lie; professional politicians absolving themselves from it as an accountability metric do.

 

Storytellers like Paulson and Geithner would have you believe that the US Dollar’s shining moments come to Bear (pardon the pun) when the world is flying for “safety.” And while it is true that if you burn the credibility of your country’s currency to a low enough level that it will eventually bounce (2008), amidst fear enveloping world markets last week the US Dollar went no bid…

 

Last week, the US Dollar Index was down another -1.38% week-over-week, closing at a fresh 2011 YTD low of $75.72.

 

For those of you keeping score:

  1. The USD is down for 9 of the last 12 weeks as the USA printed its highest monthly deficit on record in February ($223B)
  2. The USD has lost -7% of its value since the 1st week of January when it became clear that mid-term election promises would be broken
  3. The USD is down -11% since Geithner took office as the 75th United States Secretary of the Treasury

So, if the idea is to try what the French (1950s), British (1960s) or Japanese (1990s) have already tried – devalue your way to prosperity – it looks like Timmy is right on plan.

 

You don’t need to watch Charles Ferguson’s documentary Inside Job (2010) to understand the basic concept here. We’ve berated this point for 3 years and now you have socially transcending technologies (YouTube) making what drives The Keynesian Kingdom easy to see.

 

As of this morning’s latest viewership readings, here’s another way to look at the score:

  1. “Quantitative Easing Explained” (The Bernank) = 4,371, 553 views (http://www.youtube.com/watch?v=PTUY16CkS-k)
  2. “Every Breath You Take” (Columbia Business School) = 1,725,495 views (http://www.youtube.com/watch?v=3u2qRXb4xCU)

So, The People get it. They trust the US Government on financial matters as little as they ever have (that’s saying a lot). They know that US Dollar Debauchery = The Inflation.

 

But does Wall Street get it? We think it’s starting to. We can see it in the math.

 

Consider the following 6-week correlations:

  1. USD vs WTI Crude Oil = -0.88
  2. USD vs CRB Commodities Index = -0.75
  3. USD vs SP500 = +0.58

In summary, what these correlations have been telling you for the last 6 weeks is that Burning The Buck is driving The Inflation UP and the US stock market DOWN. This is interesting, but not surprising … particularly if you believe that the causality behind this correlation is primarily Big Government Intervention (deficit spending and dollar devaluation).

 

Since the US Dollar and stocks are developing a POSITIVE correlation now (like they did in Q2/Q3 of 2008), and the US Dollar and Commodity prices continue to have very high NEGATIVE correlations (like they did in Q2/Q3 of 2008), what should we be proactively managing risk towards?

 

Well, I think the scenario analysis is pretty straightforward:

 

1.       US Dollar DOWN from here

= immediate-term TRADE upside in the price of oil to $107/barrel; intermediate-term TREND upside to $109/barrel (+7%)

= immediate-term TRADE upside in Commodities (CRB Index) to 365; intermediate-term TREND upside to 373 (+6%)

= immediate-term TRADE downside in SP500 to 1251; intermediate-term TREND downside to 1231 (-4%)

 

2.       US Dollar UP from here

= immediate-term TRADE downside in WTI Crude Oil to $96/barrel; intermediate term TREND downside to $91/barrel (-11%)

= immediate term TRADE downside in Commodities (CRB Index) to 348; intermediate term TREND downside to 333 (-5%)

= immediate term TRADE upside in SP500 to 1312; intermediate-term TREND upside to 1352 (+6%)

 

I also think that The Keynesian Kingdom of stock market cheerleaders should see this as a short-term solution. The best way to DEFLATE The Inflation and have guys like me get bullish on another US stock market rally is to have a Strong US Dollar policy.

 

As for the US deficit and debt problems that stand in the way of having the international investment community trust American politicians and the US currency again – well, Mr. President, I guess it’s your problem.

 

My immediate-term support and resistance lines for the SP500 are now 1276 and 1292, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Your Problem - Chart of the Day

 

Your Problem - Virtual Portfolio


THE M3: SANDS CHINA & INTERCONTINENTAL

The Macau Metro Monitor, March 24, 2011

 

 

SANDS CHINA IN TALKS WITH INTERCONTINENTAL TO MANAGE COTAI HOTELS WSJ

Sands China is talking with InterContinental Hotels to manage two hotel towers at parcel 5 on Cotai.  Earlier, Sands had terminated a management contract with Shangri-La Asia to operate those hotels.  No details on why the agreement was terminated but it was resolved amicably.  “The termination of the Shangri-La management agreement will not have any impact on the company’s operations, ”Sands China ensured, adding that the company remains committed to its timeline of opening the first phase of parcels 5 and 6 by the end of 2011.


The Sands China’s management agreement with Starwood Hotels to operate the hotels on parcel 6 under its Sheraton and St. Regis brands remains in place, the company added.

 


ASCA: FCF AND EARNINGS

A regional uptick and market share gains should drive near-term earnings. Street too low on 2011 free cash flow too.

 

 

We’ve seen it before with the stocks of regional gaming operators.  Free cash flow yields climb into the teens and above 20%.  That high of a yield is unsustainable either because the free cash flow estimate is too high or the stock is too low.  We believe ASCA will beat Q1 EPS and free cash flow estimates so you can guess which side of the equation we think is wrong.

 

Following a string of horrible weather for casinos, the 2nd half of February bounced back and we believe March trends are pretty strong.  ASCA also appears to be gaining market share, mostly at the expense of Harrah’s.  Harrah’s regional properties are looking tired, especially the slot product, from a lack of capex.  Harrah’s has clearly opted to direct its skimpy capex budget to Las Vegas.

 

We think ASCA’s estimates need to go higher.  Adjusted Q1 EPS should be well into the 30s versus consensus of $0.28.  More importantly, we think the street is too low on Q1 and 2011 free cash flow.  ASCA will pay little in cash taxes in 2011 due to bonus depreciation and other tax breaks.  Our free cash flow estimate is $140 million or $4.25 per share on the post Nielsen Trust buyout of 33 million shares.  That is a stunning 25% free cash yield.

 

We think that level of free cash flow should be sustainable.  Any cash taxes in 2012 should be offset by EBITDA growth and less interest expense.  ASCA will close a major refinancing that should reduce interest expense considerably.

 

While the cash flow is at least sustainable, this 25% yield is not, in our opinion.  Catalysts are near term:  1) JP Morgan conference next week that should improve overall investor sentiment surrounding the regional gaming operators, 2) closing of the accretive refinancing in the next 1-2 weeks, 3) release of better March regional numbers in April, 4) Q1 earnings and free cash upside.

 

ASCA looks very good from a quantitative/technical trading perspective per the Hedgeye Macro team as can be seen in the chart below.

 

ASCA: FCF AND EARNINGS - asca


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

NOTES FROM VEGAS TRIP

Negative investor sentiment could turn positive. Regionals might be at a positive inflection point with ASCA and PNK the standouts. The bottom might be in on LVS.

 


LVS

 

Jacobs allegations & SEC/DOJ investigation

  • The Jacobs suit will either settle quickly or will sit for a while before it goes to trial, which would take a while. The judge ordered settlement discussions to take place. 
  • What happened with Jacobs?
    • If you get fired but not for cause, LVS vests all of your restricted stock and options, pays you your bonus and severance.  Jacobs wants his contract honored – which entails all of the above.  The company wanted to fire him because he was acting erratically and many people actually thought that he was looking to get fired.  After the company already made the decision to let him go but before telling him, Jacobs sold 250k of his restricted shares without asking the company, which is one of the reasons he got canned. When Leven told him that that were letting him go, Jacobs was offered his salary and bonus but not his remaining options.  In response, Jacobs threatened to spread information on Sheldon's behavior including bribing a public official which he was “collecting for months”.
  • Leven believes that Jacob’s allegations are baseless against Sheldon.
  • Think that there is nothing in the 5 issues that the DOJ is investigating and that a small settlement will be the most likely outcome. Caveated that with while Sheldon is innocent they can’t vouch for every person in their organization.
  • International investors don't fully understand the investigation and the implications, and are just staying away from the stock
  • Think that the investigation will wrap up in 6 months and that they will settle with Jacobs. Sheldon doesn't want to take this to jury trial.
  • Jacobs has a record of suing at least one former employer – Starwood

Approach to Junkets

  • Four Seasons is in the process of signing 2 very large junkets (who currently have rooms at Wynn, including David) to Four Seasons
  • Still talking to Neptune about expanding their relationship. Neptune wants additional incentives if they can bring roll from 9BN to 15BN/ month, but they are unlikely to sign such a deal
  • Strategy is to hold at the 1.25% commission level (little higher at Sands). They would like to follow Wynn's model more closely.  They are trying to add more junkets. Jacobs built a lot of the direct business that they have.
  • Want to change the dynamic of junkets—just hitting their minimums and that's all at their properties. They recently hired a new junket relations person who will hopefully improve relations over the next few months.

 Strategy with Galaxy World opening

  • Doesn't think that they will get more aggressive on marketing
  • They are more concerned with labor issues for 5 & 6

Singapore

  • Thinks that they will be capacity constrained in that market which will limit growth.
  • Property can hit $1.3BN of EBITDA this year and maybe $1.6BN next; from there, growth will slow to maybe 10% a year
  • This month they are rolling ok but win rate is low. Last month win rate was good
  • Plan on a mall sale in 2013, some sort of rent securitization, which they believe can yield $4bn of proceeds
  • Plan on refinancing the debt at MBS so they can take more cash out of the property
  • Later this year, they are planning on building a new VIP area near the roof
  • Still skeptical of whether junkets will get approved, but are taking the wait and see approach
  • They are beating Genting on the mass side, but Genting will beat them on the roll

Cannibalization from 5 & 6

  • There is likely to be cannibalization but their bet is 2014 and beyond
  • The Venetian is an $800mm property EBITDA with maybe 10% growth this year and flatting out from there
  • Hope to open a casino in January then another in May with the final one in 2013

Vegas

  • Slot business is grungy
  • They reduced their comps. Initially, they were comping too much, then not enough, now going back to center. Palazzo was filled with slot comps which got as low as 40/day - they raised the floor to $300/day players   

Other Stuff

  • Thinks that the EGTs will eventually catch on in Macau but off to a slow start. 

 

MGM

  • Things have been really busy. Their FIT calendar is really strong but think that that business will be event driven.
  • Cosmo - is doing well from a restaurant/nightlife standpoint. Don't know how the gaming business is going. Seen a big pickup in foot traffic at Crystals and Aria since Cosmo opened. From a gaming standpoint, they haven't been impacted.  Cosmo’s room rates are higher than Aria’s.
  • Feb and March feel a lot better this year than last year.  Feel good about convention business in the year for the year.
    • 1% increase in occupancy/$5 dollar increase in ADR equals $50mm of EBITDA
  • Luxury is clearly leading the way in their recovery.  Lower end properties draft off of the higher priced properties in peak periods.  Environment is less promotional today than it has been over the last few years. Doesn't think it'll be all smooth sailing though.
  • Airlines are picking their spot to add some capacity.  Over the next 90 days, there is a 3-5% seat increase coming into the market.
  • Macau:
    • Thinks that 25% of customers are coming from in-house marketing
    • Still working to clear the HK exchange on the IPO process. There is a debate of having more good quarters vs timing of IPO.
    • Talking to a few new junket operators to join MGM. Converting some of their Villas to VIP rooms. Converting some of the spa space too. Still have 70k of incremental space that can be built out. 
    • Cotai? They are a lot further along than people think. They know the site and as soon as the government will be ready to commit, they are ready to go. They will be in the same wave as Wynn and SJM. Their site is 2x they size of their Peninsula site.
    • Would be surprised if they aren't gazetted at the same time as WYNN and SJM.
  • Don't need to be in the capital markets until sometime next year. So they will just be opportunistic - more so on the debt side in pushing out the maturity profile.
  • Have almost $190mm sitting in trust in NJ. They have a 30 month time frame to sell the property. Over the first 18 months, they have oversight of the process - which expires this September 24th. 
  • 2 hospitality openings later this year.
    • MGM Grand Sanya - 600 rooms
    • Beijing 100 units (unbranded)- Diaoyutai Art Hotel. This will grow their database for direct players in Macau. Have 17 contracts signed/ LOI's for additional hotel openings which they will manage.

 

BYI

  • IL: thinks it will be tough for the state to find alternative funding for their bonds.
  • Italy: will have 4,600 machines in Italy.  Will have a variable daily fee rate.  The 7,000 machines out there now earning 2x what AWPs were earnings (80-100 euros/day)
  • Problem with 2011 is that they are spending R&D on Italy and Canada w/ no revenues till '12
  • Thinks that lots of companies are spending to their fixed charge coverage ratio – they see weak spending from operators in the first two months of the quarter with catch up in the 3rd.
  • Their oldest reel machines are 10-12 years old.  The video slots older than 8 years old have trouble sourcing parts.
  • IGT’s multi-hand poker patent expires in 3-5 years for IGT
  • Downward revision with systems was primarily due to slower rollout of iVIEW DM.  They thought they would be further along in their DM release at this point. It took them longer to rollout the DMs across the difference manufacturers.  They're in the first rollout of the iView applications.
  • Given the momentum in technology changes accelerating,- it’s taking regulators longer to approve things.
  • Pricing on slots? 3-4% annual increases are realistic.  They are realizing 5-7% price increases on the new platform.  Not seeing price pressure, however as pro series ramps as a % of sales their margins will be under pressure until they reach a critical mass.  Usually takes 12 months after a new intro of a product to start getting leverage margin-wise. 
  • Software for iVIEW will be subscription based and the premium stuff will be additional. Thinks that iVIEW DM can have a similar life cycle of penetration as iVIEW did, but it depends on content.
  • The overall cost of ownership of a windows system is a lot cheaper than a SDS system.  The IT department needed to operate their non-windows based system is a lot larger.  The Windows-based system only need a few people.  Licensing for a Windows based system is also cheaper. 
    • Other competitors for smaller systems deals include ALL & Komani.
    • Windows-based system is really helping them internationally, where many of the casinos are very small

BYD

  • Thinks that the Strip needs to recover first before their locals market recovers. In Oct, when strip was good, their business was good. Don't think that they need to fix the housing or unemployment issues. Just need to have their customers spend more per visit. Thinks that 35-40% of their locals customers are retirees.
  • Seen more aggressive marketing from STN's since February. However, it’s not hurting BYD’s properties. When they gave guidance on the last call, they already saw the impact from STNs promotions. STNs slot product is pretty old and they are starting replacing more slots.
  • M Resorts impact - saw a small impact when they first opened but it’s just too far away for their customers.  40 minutes from their properties.
  • 2011 won't be much different then 2010 unless convention business picks up materially.
  • Looking for some ideas on how to create value on the Echelon site. Are considering all options including: JV partnerships and asset sale opportunities for the site.  Rating agencies have Echelon land valued at $5mm/acre—thinks it’s worth more like $10-15mm/acre.  BYD’s cost basis on the land is around $1mm per acre
  • Always viewed as having a strip property as strategically important
  • Regional markets are doing pretty well. LA has recovered faster than they expected
  • Doesn't think that MGM wants the property to go to the trustee. Believes that the LTM EBITDA ($170MM) at Borgata is the low.
  • Thinks that the LTM EBITDA at most of their property represents trough levels
  • When does capex go back to historical levels?  Not anytime soon. Historical maintenance was $100-$120mm vs. the current 50mm. Skimping on room product. 
  • They're good on the financing side through 2014. 
  • Thinks that BYI and WMS has some new good content.
  • Definitely want to grow the company and are looking at opportunities to do so.

 

ASCA

  • After the first week of February, business has been good for them and March is strong.
  • Q1 looks good, somewhat due to East Chicago because there was so much money spent there last year.  ASCA changed their slot marketing program mid-year in 2010 that will also help comparisons in 1H2011. Last year, they also had 2 quarters of weak table hold at East Chicago and one quarter of bad hold at Vicksburg. March – May 2010 were also bad months.
  • Visitation has been improving for them.
  • Not seeing an impact from gas prices, but higher commodity prices are helping them in the Midwest economies which are commodity dependant.
  • Not much left to do on the cost side
  • Unemployment rate is so high in most jurisdictions that they aren't likely to see wage inflation.  If they do, it means that the economy is good.
  • Should get at least 50% flow through at most properties (basically only variable costs for now-taxes and marketing).
  • Blackhawk is doing fine - even if they are just flat YoY. Think that that market can be more impacted by fuel increases.
  • Harrah's:
    • Took several hundred machines off the floor in Council Bluffs and Kansas City. Sounds like they are mostly focused on Vegas with regards to any capex spend. ASCA's market share improvement partly has to do with HET’s lack of maintenance of their assets. Their properties don't look good and are starting to look really worn down.  They’re only spending exactly what they have to to meet health and safety levels.
  • Not interested in a cross marketing agreement with MGM. They already compete effectively against HET which has cross marketing with Vegas and have the highest industry property level margins – so if it’s not broken, why fix it?
  • Will use their cash flow to delever.  They won't be paying taxes this year courtesy of bonus tax depreciation and should have at least $10mm per month to retire debt.  Should get them to sub 6.0x leverage by YE and sub 5.5x by 2012. 
  • They don’t see any attractive acquisitions right now. HET and MGM can't afford to sell any assets because it would be leveraging up for them.
  • Should close the financing in 1-2 weeks
  • If not for ASCA buying back some of Ray’s stock, he would have had the tax issue next August - but the real issue was 2013. Justified premium paid for Ray’s stock:
    • Still very accretive ~ 20%.
    • Still cheap on a multiple basis
    • Will allow them to use stock as currency in the future for acquisitions or projects which really wasn’t an option before
    • Eliminated an overhang
  • No update on East Chicago bridge really
  • Thinks that IL will eventually get VLTs but no idea when

 

Konami

  • Business is outstanding, can't complain. First and second shifts at their manufacturing facility are tapped out.
  • Not expecting a huge jump in replacements in 2011 - just a few thousand units over 2010
  • HET’s product is getting so stale that sooner or later they will lose patrons to their competition
  • Canada remains strong for them as are the regional and tribal markets. They are seeing a recovery in the South West. STN is starting to buy more, BYD is starting to talk about buying more. Herbst is buying more. MGM and HET aren't buying slots yet.
  • Their participation install base is 5,500-5,600.  They don't have WAPs and don’t intend to develop WAP games.
    • 40% of their install base is on 80/20 arrangements
    • 60% is fixed daily fee which pays between $55/day and up to $65-75/day for games with the Rock on Top feature
    • Their install base grew 2,500-2,700 units YoY
  • Expect that their March for sale shipments will be up YoY materially from last year in North America and overall.  Europe is kicking in for them. Their French distributor ordered more games over the last 4 months than all of last year (this distributor isn’t exclusive to Konami so there is read-through to other US manufacturers). South America is up materially - Argentina, Uraguay, Chile – these are newish markets for them.
  • Think they will continue to take share from IGT, BYI, and ALL this year. Targeting BYI right now.  Think that they can get to 16% share in 2011.
  • This year they have 75-80 new titles.
  • Implemented a price increase on Jan 1st.  Claim that IGT has been heavily discounting. WMS and themselves are the only players who have been maintaining price.  Their ASP is over $14k. Contrary to competitors' allegations of deep discounting of their products,  they have never sold a game for $10k unless it’s used.  They do have the lowest cost basis in the industry and the highest margins on game sales.
    • They only have 350 employees.
    • Lowest break even in terms of how many units they need to sell.
  • Konami’s gaming business contributes about 25% of the operating profit ( 8-9% of revenues) of the Company and will become a larger part of the company. Thinks that their sports club business will get cut down a lot because of the disaster in Japan. Not sure that they would ever float this business.
  • Their biggest challenge is growing their systems business. Grand Falls Iowa and Des Plaines Casinos will have their Oracle based system. They were invited to compete for the systems business at Revel, Resorts, and Cordish. Thinks that BYI’s Windows is notoriously unreliable. Oracle is much more reliable, which is why all the banks use it.
  • Thinks casino legislation has moved to the very bottom of Japan’s priority list, post disaster.  Regarding supply chain concerns - they don't have a factory in Japan. Their manufacturing facilities are in Vegas and Australia.
  • They are licensing their content to other manufacturers for the Italian market

 

Nevada Gaming Commission (Mark Lipperilli – Head of the Commission)

  • His goal is to deregulate somewhat and having the agency serve in more of a consultative function than just as a regulatory body
  • Couple of bills in legislative phases to ease things.
    • Increasing the ownership threshold that requires an owner to be licensed from 0% now to 5%. Will make it easier for investors to take small stakes in casinos
    • Legalizing internet poker: Poker Stars and Full tilt have pushed the agenda. You can argue that a poker bet isn't a violation of the wire act. Although even if that is the case, you still need a license to take wagers. All the US guys will partner with an existing operator if and when online poker gets legalized. Thinks that any US technology is 5 years away from where Poker Stars and Fulltilt are today.
  • Thoughts on what goes on in Macau?
    • They aren't blind to it and it’s a controversial issue at the agency.  Part of the issue is whether the alleged laundering occurs on the mainland or in Macau.  It’s believed that it's mostly on the mainland.
  • They are doing their own investigation on LVS

 

IGT (Pat Cavanaugh)

  • Slot sales are still tough but game ops are getting a little better. Some of that is due to better game content.
  • Thinks that Japan is now more likely to happen post disaster.
  • Acqueduct: IGT will have 36% market share.
  • Launching their Reel Edge (Skill based games) shortly which, if successful, can become a new niche category of games for IGT
  • Thinks that the online space is going to be a nice source of growth for them. Today, they are just a content provider in the UK.  Figuring out how do they become a B to B provider though if online gaming gets legalized in the US.  Their online business is currently included in game ops, and generates about $40mm. Will go into Italy this year. Wager Works is really just an online casino- they need to address the sports betting and the poker/table gaming side – for which they will need a partner or license content.
  • Video poker machines last 12-15 years.  
  • They just introduced the universal slant cabinet which can be used as video poker/ video slot/ and even a mechanical reel.
  • Montana just legalized video slots. Until now, they just had video poker and keno, so this could and should stimulate replacement cycle there.
  • Feel like they are under penetrated internationally
  • Italy: Very fragmented from a systems standpoint, there is a lack of consistency from each vendor which is part of the reason why rollouts are taking so long. Right now, they are only selling/leasing Barcrest content in Italy since developing a new platform was not considered a good ROI investment for them… but that may change given that many new markets (like Greece) will also have similar platform requirements. They have signed 2 deals to place  3,000 units in Italy (SNAI & CIRSA).  Starting shipping to SNAI in Dec, will take a little while to get all those machines shipped.  The SNAI units are roughly ½ of the 3,000 units and are for sale. Cirsa units will be participation but haven't started shipping those yet.
  • IL:  Supposedly the Supreme Court is scheduled to rule on the Appelate ruling in May/June and usually rules with the government- so hopefully, there will be more visibility on VLT timing post ruling.
  • Will continue to push away from hardware dependency and more towards content
  • Over the last downturn, they have also learned to understand saturation on the game operators side and will be more thoughtful on restricting the number of any title they release.
  • Getting more thoughtful about repurposing content from successful Class 3 titles to VLT to internet titles
  • Gaming Operations: They are standardizing the hardware and platforms so that they can recycle the hardware and eventually increase the life of the games. Hope that they can move to 3 years on depreciable life from 2 currently.  Business still has returns of north of the 200% returns but used to be 300%.   Longer D&A cycle will boost margins.

 

PNK

  • Honing in on CFO in the next week or so; hope to make an announcement by month end. It's between Lewis and Carlos – but thinks it will be Carlos.
  • Pleasantly surprised with results that they’ve been seeing lately - despite the crazy weather.
  • L'Auberge saw revenue increases despite a drop in admissions
  • Baton Rouge: As long as water levels say at current levels, they will be able to get the last pole in very shortly
  • My Choice relaunching on April 4th
  • The marketing costs shouldn't increase with the Wynn announcement. The marketing deal is really just for their top 3 tiers of players which are roughly ~2,000 patrons. Will use the marketing agreement as an aspirational tool to help them encourage patrons to consolidate play at their properties to get into those top 3 tiers.  People that go to both their casinos in St Louis play 2x as much as people that just go to one. HET’s Vegas properties help them increase regional play.  Wynn will give them a certain amount of free play and free rooms. 
  • MGM wasn't willing to offer an exclusive on their co-market deal, so they passed on it.
  • Seeing admissions decrease but revenues are still up in LA. Customers at least feel more stable in their jobs. Pretty optimistic on LA. St Louis is more sluggish economy wise. Had too many competing marketing offers at their 2 properties a year ago. Now their offers are non-conflicting. Think that their market share in St Louis in 4Q will get better. My Choice will help them garner more share. That market has the most potential to consolidate play.
  • In the 6th of 9 innings re: cost cuts. Looking at cash services contracts now, consolidating some corporate and property level jobs. They’re still in the early innings on improving their marketing efforts. Overall margin improvement will slow though, unless there is topline growth. He's less cautious than just outright optimistic.
  • Wasn't surprised by Dan Lee winning the LA contract.  PENN wasn't even close in winning that contract. Dan still needs to win the local election and raise financing.  ISLE of Capri and other employees might vote against it. PNK won't spend money against Dan Lee. They do think that Dan will grow the market – just not sure if he will grow it enough not to cannabilize their property
  • Capp - he's not going anywhere - has a 3 year non-compete. Thinks that he was disappointed that he didn't get the CEO spot.

SAM – RISK MANAGEMENT UPDATE

On the back of a sell-side initiation, Keith shorted SAM in the Hedgeye Virtual Portfolio today.

 

We retain our bearish outlook on Boston Beer Company despite a positive sell-side initiation.  On March 9th, I wrote a note titled, “SAM – DEPLETING EXPECTATIONS”, discussing SAM’s 4Q earnings.  In short, I noted difficult top-line comparisons, energy cost exposure, and a new “Freshest Beer Program” that will reduce EPS by $0.20 to $0.30 as it causes shipment growth to lag depletion growth during FY11.  The combination of a slowing top line and peak margins coming under pressure from elevated input costs does not bode well for this company going forward. 

 

Furthermore, the quantitative setup is “very bearish”, according to Keith McCullough.  On SAM, Keith says, “The TRADE and TREND lines are converging above the current price; this is a very bearish leading indicator”.

 

SAM – RISK MANAGEMENT UPDATE - sam levels

 

Howard Penney

Managing Director


WHAT'S NEXT FOR OIL?: REPLAY & PODCAST

Valued Client,

 

Hedgeye's CEO Keith McCullough, Managing Director Daryl G. Jones, and Lou Gagliardi of our ENERGY vertical recently hosted a conference call on crude oil. The key questions answered included: 

  • Why has oil been trading off in the last week(s)? What's changed?
  • How should we think about assessing the upheaval in the Middle East as it relates to supply?
  • What are the key long term supply and demand factors to analyze as it relates to future price?
  • What are the implications for other energy markets?
  • What's next for the price of oil?
  • What are the best oil equities to play given the current environment?
  • What is the role of US monetary and fiscal policy in determining the price of crude oil? 

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Replay Podcast:

http://www.hedgeye.com/feed_items/12524

 

Presentation Slides:

http://docs.hedgeye.com/Whats%20Next%20For%20Oil.pdf

 

If either hyperlink fails to work, please copy & paste it into the URL of your browser.

 

Regards,

 

The Hedgeye Macro Team


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