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The Case of the Missing Stimulus

“The case has, in some respects, been not entirely devoid of interest."

-Sherlock Holmes

 

Sherlock Holmes is the fictional detective created by Scottish author and physician Sir Arthur Conan Doyle.   Doyle based the character of Sherlock Holmes on a number of prominent physicians of the late 1880s.  Indeed, criminal detective work certainly has parallels to a medical examination.  The role of the physician is to provide a diagnosis after thoroughly collecting information both from and about the patient.  Great investment research incorporates a similar process.

 

In our daily morning research process, each Sector Head provides relevant facts in our internal research meeting, which underscores our moves in the Virtual Portfolio that day (in combination with our quantitative models).  Quite often, which makes sense when you get enough”Type A”  Hedgeyes in a room, we have much broader discussions.  A few weeks back our Financials Sector Head Josh Steiner asked, effectively, whether the federal budget deficit could be narrowed by just reversing the stimulus.  That is, shouldn’t compares on stimulus spending get much easier, which would effectively narrow the deficit?  As usual, a great question.

 

To back up, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was passed by the 111th U.S. Congress in February 2009.   According to many reports, the act was nominally worth some $785 billion to the economy.  Roughly 1/3 of this came in the way of tax cuts, while almost 2/3s came in the way of increased government spending. 

 

The philosophical rationale for ARRA, according to our friends at Wikipedia, was as follows:

 

“The stimulus was intended to create jobs and promote investment and consumer spending during the recession. The rationale for the stimulus comes out of the Keynesian economic tradition that argues that government budget deficits should be used to cover the output gap created by the drop in consumer spending during a recession.”

 

Seems simple enough, even for a hockey head like myself. 

 

Interestingly, if we look at government spending in the 2008 – 2010 period we can actually see the impact of the stimulus act on government ledgers.  In fact, according to usgovernmentspending.com the U.S. federal government spent $2.98 trillion in 2008 and $3.59 trillion in 2010.  So, the net increase over this period was just over $600 billion, which roughly equates to the spending portion of The Stimulus.

 

In theory, Dear Watson, there then should then be a step down in spending as ARRA, or The Stimulus, winds down and begins to compare against itself. Interestingly, in 2011 federal government spending is actually expected to step up to $3.61 trillion!

 

The long run compounded annual growth rate of federal government spending from 1990 to 2007 is 4.47%.  If we apply this growth rate to the 2008 – 2011 period, 2011 normalized government spending on that basis would be $3.42 trillion, almost $200 billion less than what the government will actually spend and roughly one-third the size of ARRA, or The Stimulus. So, where did the stimulus go? Confused? I certainly am, but it seems that cutting government spending is not as simple as favorable compares against a “one-time” spending program.

 

But on to a more interesting case, that of today’s global macro investment outlook.  While Keith is enjoying Disney World with his two little risk managers, Jack and Callie, the Hedgeye Research Juggernaut continues to grind.  Three key data points to call out this morning are as follows:

 

1.  Europe – Overseas on the continent, equity indices are rallying hard this morning up almost 2% across the board with the FTSE and DAX leading the way.  Interestingly sovereign bond market are flashing a different signal as bond yields continue to rise in the PIIG nations and both Spain and Portugal are selling debt at much higher rates than even three weeks ago.

 

2.  Asia – Asian equity markets are also positive across the board, with China the clear negative divergence up only 27 basis points.  The noteworthy callout from Asia is the following report: “A senior Hong Kong monetary official told The Wall Street Journal on Tuesday that China's central bank is "actively considering" new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland.” This is positive for the long position we are holding in the Chinese Yuan in the Virtual Portfolio.

 

3.  Technology earnings – We are long the technology sector in the Virtual Portfolio via the etf XLK and are seeing serious fundamental support this morning from a number of key technology bell weathers.  In fact, Intel, IBM, Juniper Networks, and VMware all exceeded analyst expectations.  The results suggest that businesses are spending again. That said, IBM is trading lower as contract signings, an indicator of future demand, were less than expected.

 

Before I let you get back to your detective work this morning, I’ll leave you with one last quote from Sherlock Holmes:

 

“How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?”

 

Indeed.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

The Case of the Missing Stimulus - Chart of the Day

 

The Case of the Missing Stimulus - Virtual Portfolio


WYNN: VEGAS THE STANDOUT FOR A CHANGE

Wynn blew out our Street high LV estimate even after normalizing hold %. Don’t expect the same results from the rest of the Strip though.

 

 

As we expected, Wynn started off 2011 with a bang – blowing away Street EBITDA estimates by 28% and exceeding our estimate by 10%.  The entire beat vs. our number was due to better Vegas results, which were driven by very high hold on the table side. Wynn Macau numbers fell slightly short of our Street high estimate due to what looks like higher junket commissions.  Overall, luck boosted Wynn’s Q1 result by $44MM on net revenue and $42MM on EBITDA.  [Wynn Vegas: $50MM revenue benefit and $35MM EBITDA benefit; Wynn Macau: $6MM revenue negative impact but a $7MM positive EBITDA impact]

 

Las Vegas

The upside in Vegas this quarter vs. our Street high estimate was mostly driven by high hold.  Net revenue of $395MM was 11% ahead of our estimate and adjusted property EBITDA of $132MM was 51% above our estimate.  If hold had been normal, we estimate that net revenues and EBITDA would have been $50MM and $35MM lower, respectively – still a terrific beat vs. Street at $74 million and even above our $87 million.

  • Net Casino revenues of $194MM came in 13% above our estimate
    • Table win was $32MM higher than we estimated, entirely due to high hold. Assuming a more normalized hold rate of 22.5%, table win would have been $50MM lower and EBITDA would have been about $35MM lower
    • Table drop increased 14% YoY – less than the 20% increase we estimated
    • Slot win was $1MM above our estimate.  Wynn has historically had one of the lowest win % on the Strip so we assume they adjusted their slot mix.  Slot handle grew 7% less than our 10% estimate.
    • Rebates on gross win increased to 19% of gross revenue vs. an average of 16% in 2010
  • Non-gaming revenues net of promotional allowances were 12% higher than our estimate
    • Room revenues were $8.6MM higher than we estimated driven by RevPAR that was 8% better than we estimated. Wynn chose to push rate ADR 18% while occupancy declined 2% YoY.
    • Promotional allowances fell to 25% of net casino revenues, down from a 2010 average of 33%
  • It appears that SG&A was flat YoY at $50MM in Las Vegas

Macau

Wynn Macau came up a little short of our estimate but still 4% ahead of Street EBITDA estimates. Wynn Macau’s net revenue was 1% below our estimate while EBITDA was 7% below our estimate. We believe that the majority of the EBITDA miss vs. our estimate was due to higher junket commissions.

  • Net casino revenue of $812MM was $7MM below our estimate
    • Gross VIP table win was $2MM below our estimate while net VIP table win of $553MM was $5.5MM below our estimate
      • Table volume of $29.3BN was $200MM below our estimate while hold of 2.69% was 1bps above our estimate.
      • Direct play was 10% for the quarter vs. our estimate of 11%, due to the introduction of new junket operators. We would expect the direct play share to fall a bit further for the balance of the year with the introduction of 20 more VIP tables.
      • The rebate rate was 82bps (vs. our estimate of 80bps) or 30.5% of hold %.
      • Had hold been normal at 2.85%, gross table win would have been $47MM higher and net revenues would have been $33MM better while EBITDA would have been $8MM higher. 
    • Mass table win was $1MM below our estimate
      • Table volume grew 29% YoY vs. our estimate of 50%. However, lower volume growth was offset by high hold.
      • Assuming 24% hold, revenues would have been negatively impacted by $27MM and EBITDA would have been $15MM lower
  • Non-gaming revenues net of promotional allowances was $2MM below our estimate due to slightly lower F&B revenues and slightly higher promotional allowances
  • We estimate junket commissions (in excess of rebate rates) were $17MM above our estimate
    • Our best guess is that the blended commission rate increased to 43.6% compared to 40.6% in 2010 and 42.2% in 2009.  We had estimated a blended commission rate of 41%.
    • We estimate that fixed costs were $94MM in the quarter – in-line with our estimate

Other stuff

  • Corporate came in $9.5MM lower than we estimated – down 50% sequentially and up 13% YoY

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PENN YOUTUBE

In preparation for PENN’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its Q4 earnings call and subsequent conferences.

 

 

COMMENTARY FROM POST EARNINGS CONFERENCES

  • “The first half of the quarter I would say, was pretty challenging in terms of weather. The second half it’s been a lot better, and I think so when you average it all out it’s sort of in-line. But I think it’s going to be interesting to see what sort of the consumer holds for us in the next couple of months here, because looking forward you can sort of wave that away, that sort of rebound that we saw in the second half of the first quarter due to pent-up demand. We won’t have that excuse in the second quarter. And so we’re going to be interested to see where the consumer spending trends lie. So far so good in terms of what we’re seeing, at least as we end March. The fourth quarter – in terms of same-store sales – was the first quarter that we were up in terms of same store spending over the last three years. So hopefully that trend continues over the next four quarters.”
  • M Resorts
    • “Well, we pointed out earlier that the 28,000 slot machines that we have in our portfolio, in our footprint, and when we add in the capacity that we expect to bring from the three new greenfield projects plus the M Resort which again will consolidate probably in the – at the end of the second quarter this year. You’re talking about a 32% increase in slot machines and hopefully a similar or greater increase in profitability for us.”
    • “M Resort, basically kind of an old story, but we acquired all of the debt in October of 2010 for $230 million. We have reached an asset purchase agreement with the Marnell’s. We are really just waiting for regulatory approval from the state of Nevada. We’re getting indications that that will probably happen in June, maybe in May, and then obviously, we would go ahead and close out the facility at the time.”
    • “We’ve already booked, the M Resort only has 390 rooms. And we have already booked about 2000 room nights, and we’re only halfway through that marketing cycle. So I think, we are feeling, we are feeling pretty good about this acquisition and the return potential, subject to regulatory approval of course.”
  • Ohio
    • “It’s probably more likely than not at this point those VLTs are legalized at the tracks in Ohio.”
    • “There is going to be no smoking in Ohio.”
    • “We’re in a process right now where we think by April – we’ve got our construction permits filed with the state. They owe us a response by April, but obviously Ohio and Columbus has been a very difficult process to say the least.”
  • “ We generated free cash flow of $301 million last year. We think that number is going to rise to $340 million this year.”
  • “We are very focused on margins. This last year has been probably the single focus from an operations perspective on how we can improve our operating margins, and it has been a tough environment. Obviously, the economy is not exactly robust. But we’ve been able to do a nice job over the last year, and I think you’ll continue to see us make some progress in that area certainly going forward.”
  • “And then Perryville opened up in September. We basically planned to spend $98 million, we had spent roughly $86 million. The bulk of that will get spent as we finish up our billings from the construction folks down through the first quarter and maybe even a little bit into the second quarter.”
  •  “Kansas is in a race with Toledo right now to see who opens first. Kansas is about three weeks ahead of Toledo right now.”
  • “Our project CapEx spending is going to be approximately $340 million or $350 million in 2011.”
  • “As it stands today and I am not saying that our stock is overvalued by any stretch, but it’s not as compelling obviously as it would be if it was in the lows 20s. And I would point out, even back in ’08 from a debt perspective, we had roughly $1.2 billion available to us at the time. We could have purchased more, but Peter’s first and my first concern is let’s not be over leveraging ourselves, let’s make sure that the company is going to be viable and that we are not putting ourselves in a position like some of our competitors have done in the past where we’ve gone out and bought back a bunch of shares and then had to turn around and reissue them at a lower price. We find that to be rather counterproductive.”

 

YOUTUBE FROM Q4 CONFERENCE CALL

  • “We’re seeing flat year-over-year kind of spending behaviors across most of our businesses. And our outlook for 2011 is more of the same. We are not seeing any downward trends that we saw maybe a year ago, that has stabilized. But we are not seeing any strength and any rebound in the consumer to any note. So we’re flat, we continue to expect it to be along those lines until we see the fundamentals of the macroeconomic conditions improve, which we haven’t seen yet and that’s how we’re thinking about 2011.”
  • “With regard to Lawrenceburg, we already expect competition coming in the Cincinnati market with Rock’s development. They are going to have their groundbreaking, I believe, later this week. And we expect late ‘12, early 2013, they are going to be opening. So we know ‘11 and ’12 are going to be the last two years where we’re not facing competition there. I think the land-based casino in Cincinnati will be more of a competitive threat to us than what River Downs may do or what may happen elsewhere in that market and we’re trying to manage that business with the expectation it will get smaller in 2013.”
  • “What we’re seeing out there in all these regional markets is a rational environment for promotional spending. We’re not seeing any of these markets that are having any of our competitors trying to capture share with increased marketing reinvestment.”
  • “Looking forward to next year, we’re expecting CapEx in the first quarter to be $108.4 million with new projects representing roughly $70.2 million and maintenance CapEx of roughly $26.9 million. And for the year – and then on top of that, is $11.3 million for the Hollywood – our expected contributions for the Hollywood Kansas Speedway. And for the year we’re looking at roughly $289 million in new projects, $88.5 million in maintenance CapEx, and $71.1 million for the Hollywood Kansas Speedway joint venture which totals up to $449.2 million.”
  • “Corporate expense [yearly run rate] is roughly $78 million.”
  • “And with regard to slot capital, I don’t think, Steve, much has changed in 2011 as we’ve thought about it in years past. It’s still about 60% of our total maintenance capital which gets us to refresh about one-seventh of the floor across the enterprise. So, nothing really has changed. We’re going to continue to keep our product fresh; and relative to our competitors, I’m very confident that we’re not going to be behind any slot product that’s out there in a competitive environment.”
  • [Casino Rama] “No, the contract formally ends in July. We’re in the process right now of negotiating an extension, which we think is going to be a bridge to the RFP process for complete new re-bid activity. But since we don’t yet have the contract or the extension formally signed and we haven’t finalized the terms, we’re basically not including that in our guidance at this time. Obviously when we give next quarter’s guidance if we’ve managed to nail this thing down, then obviously we’ll put it in because we’ll have a good handle on what the term is and what the fee structure is.”
  • [Back-end increase in 2011 depreciation guidance] “The full year impact from obviously there’s the M, there is also the Perryville, there’s the addition in Joliet, which just came online. We’ve also got full year impact from the Charles Town and Penn National."

THE M3: MORE HANDOUTS; NEW LVS LAWSUIT; HK BRIDGE

The Macau Metro Monitor, April 20, 2011

 

 

MACAU RESIDENTS TO GET HANDOUTS RTHK news

Another cash handout is coming.  In 2H 2011, every permanent resident will receive MOP 3,000, while each non-permanent resident will receive MOP 1,800, according to Macau CEO Chui.  This follows the HK government's announcement of a HK $6,000 handout to each adult permanent resident.

 

Chui also said he would submit to the Legislative Council additional measures to curb speculative trading in the housing market.  They include the introduction of a special stamp duty and tighter mortgage lending.


NEW LAWSUIT ACCUSES LV SANDS OF MISMANAGEMENT IN CHINA LVRJ

The Louisiana Municipal Police Employees Retirement System is seeking LVS to sue its own directors to recover damages, because directors failed to ensure management was operating properly in China.  The latest lawsuit was filed Monday in U.S. District Court for Nevada in Las Vegas against CEO Adelson and a number of officers.

 

GDI 'VERY CONCERNED' ABOUT BRIDGE SETBACK Macau Daily Times

The Infrastructure Development Office (GDI) is concerned that the development of the HK-Zhuhai-Macau Bridge could be delayed by 6 months due to a court ruling by the HKSAR Court of the First.  The court ruled that the HKSAR director of environmental protection, Anissa Wong Sean Yee, should not have granted permits for the construction and operation of the bridge’s boundary crossing facilities, and a 12 kilometer link road.  The HKSAR Transport and Housing Bureau said the target of completing and commissioning the bridge by 2016 was still viable.


Currency Crash

This note was originally published at 8am on April 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation.”

-George Soros, April 10th, 2011

 

That’s a very simple but critical comment Soros made last week at the Bretton Woods meetings in New Hampshire. He wasn’t talking about the US. He was talking about China.

 

He or she – whoever the overlord of policy making may be – should be thinking long and hard about what a US Currency Crash not only means for The Inflation that’s priced in US Dollars, but what they can do to fight it for the sake of their starving citizenry.

 

US Currency Crash?

 

It’s in motion folks – and if it happens, I think it happens in the next 3 months.

 

That should read as a bold statement, because it is… And the best way to put a picture with that prose and turn up some volume will be to dial into our Q2 Global Macro Theme conference call today at 11AM EST (email sales@Hedgeye.com if you’d like to participate).

 

As is customary, Big Alberta and his Hedgeye knights have prepared the anchor with a 50 slide presentation that will lock us into making the risk management calls that we don’t think you can afford miss.

 

As a reminder, with the intermediate-term TREND overlay of Growth Slowing As Inflation Accelerates, our Q1 Global Macro Themes were:

 

1.  American Sacrifice  - a scenario analysis and calendar of catalysts for the US Dollar

2.  Trashing Treasuries – long of The Bernank’s Inflation, short US Treasuries

3.  Housing Headwinds II – part deux in the Josh Steiner chronicles of the best Housing work on Wall Street

 

This morning’s call will focus on what an expedited US Currency Crash could look like and the following Q2 Global Macro Themes:

 

1.  Year of The Chinese Bull

2.  Deflating The Inflation

3.  Indefinitely Dovish

 

While we realize we have a target on our foreheads for calling out places like The Lehman Brother, The Bear Stearn, and The Banker of America, we have grown accustomed to it and we wear it with pride.

 

Living a risk management life of consensus and strong buy versus maybe buy it after we tell our super duper clients to sell into you isn’t a life to live. At Hedgeye, the name on the front of our jerseys mean more than the ones on our backs. We don’t make contrarian calls for the sake of being contrarian. We make these calls because we think they have the highest probabilities of being right.

 

Maybe we’re a little artsy with our Soho office. Maybe we’re a little jocky with our dressing room in New Haven. But when we make a call, there is no maybe – it’s long or short – and it’s on the tape.

 

On the Currency Crash call, I’ll save the juicy details for 11AM. We didn’t need to have a super secret one-on-one in Washington with a “consultant” to the professional politicians to make this call either. Over the last 3 years we’ve made 19 long and short calls on the US Dollar – and we’ve been right 19 times – so we’re going to stick with the process on that.

 

On The Chinese Bull

 

Oh what a sexy call this one is going to be. The Hedgeyes versus the former roommate of a Yale Hockey player – Jim Chanos. We were bullish on China in 2009, bearish on China in 2010, and now we’re going to ride shotgun on this red bull before consensus does.

 

Last night’s Chinese GDP growth report beat our already above consensus estimate, coming in at +9.7%. While that’s a sequential slowdown versus the Q4 2010 China GDP report of +9.8% - that’s a deceleration in the slowdown – and on the margin, which is what matters most in making Global Macro calls, that’s what we call better than bad.

 

When better than bad is cheap (which Chinese equities are on an absolute and relative basis to both themselves and Asian Equities overall), that’s when shorts have to start covering. When better than bad is cheap and price momentum turns positive – that’s when Wall Street has to chase the asset’s price performance.

 

More on that and why we think Chinese inflation is setting up to deflate from the Elm City during our conference call. If it’s the beginning of the quarter, it’s Global Macro Theme time at Hedgeye.

 

My immediate-term support and resistance lines for oil are now $105.41 and $109.24, respectively (we bought our oil back this week at $106). My immediate-term support and resistance lines for the SP500 are now 1308 and 1325, respectively (we’re short the SP500).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Currency Crash - Chart of the Day

 

Currency Crash - Virtual Portfolio


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