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MGM: Q4 NOT AN INFLECTION PT ANY MORE

How are we looking now? I called out management on their projections for a stable Q3 and a positive inflection point in Q4, which were issued during their Q2 conference call. I try, but I too am unable to predict the future. Visibility in gaming is notoriously cloudy especially when times are tough. Booking windows get even shorter. Management had no business making that prediction.



  • MGM will report Q3 EPS on Wednesday morning. I expect a sequential decline in trends from Q2 and a decidedly more negative outlook for Q4. Will management be so bold as to predict a Q1 positive inflection point? Obviously, MGM is still trying to raise financing for CityCenter and is incentivized to put the best Las Vegas face forward. Hopefully, though, the company will be more realistic this time around.



  • YouTubing: The following are some important metrics and quotes from the Q2 release and transcript that should be updated on Wednesday:

    • CityCenter Residential - 1,421 units sold or 54% of inventory for $1bn as of early August
    • Regarding closure rate for CityCenter residential – “we feel very, very confident in the quality of the customers that we’ve not only signed up but are signing up today as well who are entering into new contracts”
    • $1.65bn in committed financing for CityCenter
    • All in cost of CityCenter of $9.1 billion
    • Capex for “remainder of 2008 and 2009 significantly below recent past”

    We already know business is not good and likely will not recover until mid-2009 at the earliest. For us, the big issues relate to the balance sheet and financing, both for CityCenter and MGM corporate, covenants, and CityCenter residential sales and close rates. MGM has a $1.3 billion bond maturity in 2009 and a $1.1 billion in 2010.






S&P500 Levels Into the Close...

Today's intraday low came on the open at 858.77. We issued a downside support level of 857.86 in our Early Look strategy note... close enough.

Realizing that most don't believe you can make "market calls", I am dedicating my career to taking the other side of that trade. Never let someone tell you that you can't do something.

Our refreshed levels for the S&P500 are as follows:

Buy for a "Trade" = 848

Sell that "Trade" = 921

My name is Keith McCullough, and I support this message.
KM

We’re Liking UA On A Bad 2H

I don’t see how UA hits 2H targets, but that’s hardly an out-of-consensus view. We’ve been warming up to UA…and a bad EPS event might be the opportunity we were waiting for.
As Brian noted in his earlier post (Capitalists Starting to Emerge), we’re a lot less concerned with earnings revisions as we are with which companies will still exist over the next 2 years. Who goes away? Who doubles in size? UA is the latter. I’ve been getting more jazzed about this name (check out our 9/28 post -- I’m Warming to the Armour), and think that any weakness around tomorrow’s earnings event is a great chance to get involved.

We’re 6% below the Street on the quarter, and 12% below for the upcoming 12 months. This is almost entirely due to weak gross margins. It’s been our view for a while that with UA growing into lower margin businesses with dominant competition and high cost of growth, Gross Margins should come down. Well, we’re finally there.

I cannot look through weak GMs by any means, but what I like is that UA has consistently driven its SG&A ratio despite over-delivering on the top line. In other words, it has been adding the assets to fuel the top line, and also has cost levers to pull in case revs fail to deliver. We go over this more in our 9/18 post (UA: Warming Up To The Armour).

It’s tough for me to find a company where I can identify the top line doubling over 4 years. I think that even in this economy, UA will see it. 6.5x EBITDA is not cheap relative to some other names in retail (trading as low as 2.5x-3.0x), but I’ll pay a premium for growth in this environment – especially given that some peers will cease to exist.

Casey Flavin
Director

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Eye on Credit: Signs of a November Thaw?

A few weeks back, wily ole’ George W. Bush commented on the credit markets by explaining “you see… they’re frozen… an ya know, what we need to do here… is, gettem’ unstuck.” We math and physics students knew what he was trying to get at – thawing. The Fed’s commercial paper program begins today. This is the most positive macro signal that we currently see across our global risk factor matrix.

In an interview this morning Bill Gross said that he anticipates a credit “loosening”, resulting from the launch of the Treasury Department’s commercial paper program today, that should start to be felt in the credit markets before the week is out. Gross (the man of the hour as of late), while continuing to express discomfort over Paulson & Co.’s policy decisions, said that he anticipates that the new window will have its desired effect in the near term.

Thawing or “loosening” in the commercial paper market is crucial for Paulson’s “jumper cable” strategy. It is hoped that cheap short term money will act like a bloody mary for hung-over borrowers and that they will return to more normal drinking patterns soon.

As outlined below, we are already starting to seeing to see spreads narrow - this action in the CP market should only facilitate a further narrowing.

Keith McCullough & Andrew Barber
Research Edge LLC

PENN: CONF CALL UPDATE

Cash from Fortress of $775 million could be received as soon as Friday, pending regulatory approval from the Missouri Gaming Commission. PENN expects the approval sometime this week. PENN has already received a nonrefundable deposit of $475 million for the preferred security. The remaining $775m is currently in escrow.
I personally own shares of PENN

Wal-Mart versus QSR

WMT is attempting to steal breakfast market share from QSR operators.

Nation’s Restaurant News reported that Wal-Mart is focusing a considerable amount of marketing dollars to steal breakfast sales. The company is now airing a commercial that asserts families can save $900 per year by having breakfast at home once a week rather than buying a fast food breakfast, which the commercial states can cost up to $5 per person. Wal-Mart is going after breakfast share at the same time most QSR operators have targeted breakfast as a new source of incremental sales.

Please refer to the link below to view WMT’s commercial pushing breakfast sales.
http://walmartstores.com/Video/?id=1142

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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