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Old Men

This note was originally published at 8am on August 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“By 1918 everyone under the age of forty was in a bad temper with his elder…there was among the young, a curious hatred of “old men”.  The dominance of “old men” was held to be responsible for every evil known to humanity”

-George Orwell


The easiest path for an individual to take when faced with a suboptimal set of circumstances is to shift the blame, or burden, to another party.  For anyone that has been part of a team, be it a sports team or any group of people striving towards an individual goal, what sets a good team apart from a bad team is that the individuals therein do not shirk from responsibility or duty – they seek it and thrive as a result. 


Lately Keith has been constantly highlighting the (wit and) wisdom one of the great American winners of recent times – Vince Lombardi.  During a time of political and economic turmoil, the philosophies of leaders like Lombardi are far more likely to lead us out of the situation we face than those currently holding court in Washington D.C. 


“Old men” being hated in 1918 sounds quite similar to “old men” being hated in 2011.  The hatred of 2011, in my imagination, is not aimed solely at men of a certain age – I hope to become an old man one day – rather, it is aimed at men, typically old, that are stuck in old methodologies that have failed time and again. 


Rather than stopping, rethinking, reworking, and evolving, “old men” in 2011 simply press replay all the while expecting a new outcome.  Political and economic dogma is what is drawing ire among voters and market participants. 


Yesterday rumors that the most recent of the “old men” to head up the Federal Reserve in this country, Ben Bernanke, will start a fresh round of stimulus may have prevented the longest slump in performance of the Dow average since 1978; the Dow had fallen for eight consecutive days on the back of growing concern that the U.S. economy may slow further and that the $1.07 trillion in lost market value from American equities over the eight-day slump could begin to negatively impact consumer spending. 


History shows that “Old Men” in the financial industry have generally been put out to pasture by fresher, more original and adaptive players.   It is Hedgeye’s view that dogma and opacity will be exposed, real-time, in the finance world of tomorrow.  Whether it is via Twitter or another medium, the hatred of “Old Men”, and the conventions of their era, is driving the debate into the open.  In the research world, that is where Hedgeye is positioning itself.


The hedge fund industry is also changing.  It always has.  The book “More Money Than God”, by Sebastian Mallaby chronicles the history of a small group of people that shaped the hedge fund industry.  From the creator of “hedged” funds, Alfred Winslow Jones, to George Soros, the professional longevity of each character was largely defined by his ability to stop and rethink.  Jones did not adapt and so his protégés abandoned his firm upon realizing that the fund’s successes were down to them and not Jones. 


Soros, having studied the philosophy of Karl Popper at LSE in the middle of the twentieth century, held firm the belief that humans simply cannot know the truth.  He then developed this own idea of how markets work, building off the thoughts of Popper, called the Theory of Reflexivity.  The development of this theory enabled Soros to retire as a hedge fund manager with his abilities as an investor almost never questioned, nor deemed out of date, by his peers.  In terms of managing money, specifically, Soros may now be a man of a certain age but he never allowed himself to be one of the “Old Men”.


What’s clear at this point is that the bad team of “Old Men” in Washington is spending the majority of its time apportioning blame and jostling for media limelight.  The signs of Americans’ hatred for these “Old Men” are everywhere to see: consumer confidence, the stock market, 45.75 million people on food stamps (no double-dip for these folks, just one long downturn).  The number of people receiving food stamps increased 12%, year-over-year, in May 2011.  Alabama is the state that saw the largest increase at 120%.


Our troubles are causing the “Old Men” abroad to respond because it is starting to hurt other economies too.  Japan is following Switzerland in intervening in the currency markets as the currencies’ “safe haven” status could hurt their respective economies.   Europe is constantly on edge, fearful of contagion, and ready at a moment’s notice to extend further bailouts to periphery nations.


Blaming “Old Men” won’t fix any problems in the financial system, nor will it fix any problems in Washington D.C.  Leaders stepping forward to enact change for the better have to have the courage to do so. 


That is what Hedgeye is attempting to do in our small part of the world and our clients, critics, and supporters help us sustain our efforts.  Globally, governments are being overrun by dogmatic “Old Men” eager to get, and stay, in office. 


Irrespective of the performance of the S&P 500, the fortunes of Main Street America have not been improved over the past two years; some new ideas are needed.


Function in disaster; finish in style


Howard Penney

Managing Director


Old Men - foodstamps may 2011


Old Men - Virtual Portfolio

Water Crashes

“Empty your mind, be formless, shapeless – like water.”

-Bruce Lee


With stock and commodity markets around the world crashing, let’s review the two things that Fiat Fools who fundamentally believe that they can arrest economic gravity do to markets:


1.       They shorten economic cycles

2.       They amplify market volatility


So, let’s fire up La Bernank this morning and do some more of that!


C’mon. Really? Europe has its own issues to deal with, but is America that dumb? Americans didn’t stand for Fed Head Arthur Burns and President Jimmy Carter perpetuating economic stagflation in the mid 1970s, and I don’t think they will now.


Wall Street/Washington is not America.


Some asset managers may very well think that’s America. Some are already begging for Bernanke’s bazooka this morning. But they should remember a very important factor in the business of money management – they are managing other people’s money.


Like it did when they were begging for “shock and awe” rate cuts in 2008, other people’s money is crashing, again. So let’s review: 


1.   EUROPE:


A)     Greece is gone – crashed (down -43.9% since FEB 2011)

B)     Italy, crashing - MIB Index down -34.6% since FEB 2011

C)     Germany, crashing – DAX down -25.6% since May 2nd(and that’s the healthiest European economy!)


2.   USA:


A)     Financials (XLF) – crashed (down 29.2% since FEB 2011)

B)     Industrials (XLI) – crashed (down -23.7% since APR 2011)

C)     Basic Materials (XLB) – crashed (down -22.2% since APR 2011)


Now what does the end of April and early May 2011 have in common with both German and most US stocks putting in lower long-term highs versus the 2007 bubble peaks?


Ah, oui, oui, mes amis – c’est La Bernank!


Let’s not forget that April 2011 was the date whereby Ben Bernanke one-upped his own record setting precedent pace, debauched the US Dollar to all-time lows (post Nixon 1971, post Gold Standard), and held the Fed’s 1stever Global Press Conference On Money Printing.


Nice Trade… until it blew everyone up who was chasing yield.


What about the long-term TAIL risk associated with the gargantuan Fiat Fool Experiment that Bernanke’s Princeton buddy Paul Krugman encouraged the Japanese to engage in before locking themselves in the Keynesian death grip of GROWTH SLOWING?


Since 1992, Japan’s average annual GDP Growth has been 0.85%. And while that’s actually better than what Bernanke produced in Q1 of 2011 (0.36% US GDP Growth), that’s still not good.


On top of its debt and deficit problems… America, now we have a GROWTH problem. And if we think we are going to solve it by printing moneys and begging for La Bernank, we deserve to keep crashing.


Back to the Global Macro Grind


Whether we are going to thank them for making up their numbers like we do in this country or just thank them for not completely imploding their economy overnight, China – Thank you.


Last night’s Chinese economic data for July was as follows:

  1. INFLATION: CPI only up 10 bps in July to 6.5% y/y (vs. 6.4% in June)
  2. GROWTH: Industrial Production growth slowed sequentially in July to 14% y/y (vs. 15.1% in June)
  3. INVESTMENT: Fixed Assets Investment YTD growth slowed marginally in July to 25.4% y/y (vs. 25.6% in June)

I put inflation at the top of this 3-factor model because that’s really what China needs to solve for in Q3/Q4 of 2011. If they do (and we think they will), Chinese inflation growth should slow towards +5% year-over-year with GDP Growth running closer to 8%.


Chinese economic growth has been slowing for 15 months as inflation accelerated. Commodity inflation in China was perpetuated by the US Federal Reserve printing money (Global Commodities trade in US Dollars). Now we are seeing what Hedgeye has called for (a Deflating The Inflation) – and that’s a very good thing for China.


Deflating The Inflation is also a very good thing for you, The Consumer. And, in the end, instead of money printing I think 95% of Americans would take a 30% off sale at the pump than another call by Goldman to buy oil at $112/barrel (where Hedgeye said short oil – not that we keep a time stamp on these things or anything).


When it comes to calling this Globally Interconnected Market, “empty your mind, be formless, shapeless – like water.” Money printing may have very well flowed from the gushers of Academia’s Keynesian Dogma for the last few years but, as Bruce Lee reminds us: “Now water can flow or it can crash.”


“Be water, my friend.”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $78.54-91.66, and 1070-1172, respectively. Our asset allocation in the Hedgeye Asset Allocation Model maintains a 0% position in US and European Equities and a 67% position in Cash. In the Hedgeye Portfolio, I covered shorts yesterday and will look to re-short strength today.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Water Crashes - Chart of the Day


Water Crashes - Virtual Portfolio

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Decent hold adjusted quarter. Forward commentary was very bullish and better than we expected.



“We have shown growth in year over year cash flows throughout the first half and expect those trends will continue. We believe the foundation of the Las Vegas recovery is solid and our business is building”

- Jim Murren, MGM Resorts International Chairman and CEO




  • Adjusted EBITDA: $366MM
    • Domestic wholly owned Adjusted Property EBITDA :$331MM
      • "Despite a lower table games hold percentage in the current quarter and an approximately $12 million impact related to the state mandated closure of Gold Strike Tunica in May 2011"
      • "Casino revenue ... increased 1%... . The overall table games hold percentage... was below the low end of the Company’s normal range of 19% to 23%. The overall table games hold percentage in the second quarter of 2010 was near the low end of the Company’s normal range which affected Adjusted Property EBITDA by approximately $27 million when compared to the mid point of the Company’s normal range." 

      • "Slots revenue increased 4% compared to the prior year quarter, including an increase of 7% at the Company’s Las Vegas Strip resorts."

      • Las Vegas RevPAR +10%
    • City Center Adjusted EBITDA: $64MM
      • "Positively affected by a higher than normal table games hold percentage."
      • Net Revenue: $275MM
      • Aria:
        • Net revenue: $233MM
        • Adjusted Property EBITDA: $53MM (includes an $18MM benefit from high hold)
        • RevPAR: $181 (ADR: $202/ Occ: 90%)
        • Vdara Adjusted Property EBITDA: $5MM
        • Crystals Adjusted Property EBITDA: $6MM
        • Residential impairments: $53MM
    • MGM China Adjusted EBITDA: $170MM
      • Net Revenue: $668MM
      • "Primarily due to an increase in VIP table games turnover of 110% and a 21% increase in main floor table games drop. VIP table games hold percentage was slightly above our expected range of 2.7% to 3.0%"
      • EBITDA includes $3MM of branding fees
      • D&A: $75MM
  • Balance Sheet:
    • Cash & equivalents: $922MM ($417MM at MGM China)
    • Debt: $12.8BN
      • $2.3BN under the MGM resorts credit facility
      • MGM Macau Credit facility: $591MM
      • $1.2BN of borrowing capacity



  • In Las Vegas, they expect to see continuous improvement in the back half of the year and into 2012
  • Net net adjusted for hold and the losses at CC residential, Adjusted EBITDA would have been $422MM  
  • Increase in short term bookings and strong demand across the portfolio led to stronger than expected RevPAR at MGM. June was their strongest month - up mid teens %.  FIT/Retail is their strongest segment in Vegas. National rated play was great, but international was weaker
  • In Detroit, they had the best quarter in slot play
  • Seeing a recovery in the domestic consumer and are benefiting from M Life. With the completion of the M Life roll-out they expect to see increases in non-gaming businesses as well.
  • Promotional spend is down as a result of more targeted marketing
  • Recovery in Vegas is broadbased - luxury saw 9% EBITDA improvement and core properties saw a 16% increase in EBITDA
  • Tunica is now back on track and performing well
  • D&A: $85-95MM per quarter going forward due to Macau consolidation
  • Leverage for June 30th is 8x - pro forma for MGM Macau consolidation
    • $22.4BN VIP RC
    • Mass Drop: $544MM
    • Slot handle: $862MM
  • NJ approved the extended plan for MGM to divest their share in Borgata
  • Bellagio's room remodel program started this quarter and will be completed by YE. Expect a $30/night room premuim when the renovation is complete. MGM Grand will begin their room remodel later this year and it will last one year.
  • City Center
    • ARIA: Benefited from growth in the convention segment and from strong table and slot volume
    • Vdara: 1300 hotel rooms online
    • Crystals: SS sales up 24% YoY- 2nd highest sales per SQFT in Las Vegas
    • Residential sales pace is slow, but the leasing program is good - 346 units were leased to date with expected revenue of $8MM
  • Las Vegas:
    • booking pace for the summer is up nicely and for the fall as well
    • +10% in 3Q RevPAR
    • Sept & Oct months are exceptionally strong. Convention mix up 300bps YoY.
    • Event calendar is also strong in the back half of the year
    • Expect that these trends will continue into year end
    • Expect to be able to drive these revenue improvement to the bottom line
  • Hoping to secure land approval in Cotai in short order
  • Looking for other expansion opportunities in Asia and beyond



  • They had a poor April  - held very poorly. In May, June and July they've done well. They've been enjoying a high end resurgence recently.
  • Doesn't anticipate to cut material costs from here - payroll is pretty flat. Look to cut expenses in February every year. Their results are improving so there doesn't seem to be a reason to cut more costs
  • F&B, retail, entertainment were all up in the quarter and are seeing those trends continue into the summer
  • Slot business in Las Vegas:
    • General improvement in the customer coming to Vegas
    • General increase in RevPOR which drives slot play
    • M Life helping
  • MGM Macau: Adding a lounge next week in August. In-house VIP upgrade coming online later this year.  There is an opportunity to add more leverage in Macau. They will look at a new facility to bring down the cost of debt.
  • Delta between group and leisure in Las Vegas. Convention is relatively flat YoY but they've seen a nice pickup in the retail channel.
  • Expect to be up again in 2012 for Convention rate; Leisure & Retail is driving confidence in 3Q. Seeing similar growth in convention and leisure block.
  • Macau VIP hold was 3.1%
  • This past weekend was packed in Vegas. They have had no changes in their call center, booking, or consumption activity over the last week or so.
  • July share decrease was hold related
  • Cash ADR - the entire increase was cash because the comp rate was flat YoY
  • Weakest component at Aria is the entertainment  - primarily the Cirque show. Think that Aria should have done a little better in the quarter but are happy with the performance.  The show is only 1/2 occupied. A good show should contribute $40-50MM of EBITDA.  Their show doesn't contribute any EBITDA nor does it bring in the traffic benefit. 
  • Aria win per slot per day: +9% from $188 to $206
  • General strength in the Macau market has continued. Liquidity has remained strong. Market is pretty stable regarding commissions.
  • Convention mix is the smallest % of business in the 3rd Q - 12.5-13% this year.  Rate delta is $40-60 between leisure and convention.
  • 12% increase in active players in their database since launching M Life and average spend per trip increased 4%. Up double digits in people moving up in tiers. Added 500k customers in 2Q. At 1.5MM enrollments YTD.
  • Mirage had its biggest booking month in July.  Booking months in general are not falling but accelerating at some properties.
  • Highly unlikely that they will be tapping the debt or equity market from MGM this year. They will be in the bank market.
  • Already brought back $190MM of cash from the Macau JV
  • Goal is to deleverage the company
  • Booking pace in 2012 is a lot less informative on the retail business booked - which really only books out up to 4-5 months in advance.  Mandalay Bay has been sold out pretty much for the next 4 months. Going into the fall they hope to be 80% booked on the convention side. Have 60% of their rooms book for 2012.
  • Are prepared to start moving dirt in Macau as soon as they get approval. Would take about 3 years to build once they have approval.
  • Haven't decided on a dividend payment strategy for MGM Macau - they will meet with the board and discuss. They do want to leave powder to grow. 
  • Their revenues from mgmt hotel contracts won't be substantial until 2013/2014.  They expect that they will generate $50MM in a few years and then hitting $100MM.
  • Have 65 units left at Mandarin, at Veer have 202 units remaining

Covering Japan… We’ll Be Back

Conclusion: We covered our Japan short earlier this afternoon, as it is immediate-term TRADE oversold. The intermediate and long-term issues facing the Japanese economy remain, however.


Position: Covered our Japanese equities short (EWJ).


Today, Keith covered our short-Japanese equities position with the Virtual Portfolio for a gain. The position – perhaps aided by the global equity market selloff – continues to be one of our core theses in Asia over the intermediate and long term. From an intermediate-term perspective, the bearish catalysts remain: 

  • ZERO interest rate policy continues to depress confidence and growth;
  • Burgeoning debt/deficits is setting up a likely a growth-negative fiscal adjustment;
  • Regulatory uncertainty surrounding the timing of leadership changes and nuclear power regulation is depressing industrial production and both consumer and business confidence;
  • Sharp yen appreciation is weighing on corporate profits and (subsequently) job creation via declining business investment; and
  • Slowing sequential growth momentum bumping up against increasingly tough YoY economic growth comparisons. 

See our 8/1 note titled, “Things Are About to Get a lot Worse In Japan” and our 5/16 note titled, “Time to Press?: Revisiting Japan From a Secular Perspective” for more details.


Contrary to the consensus belief that quake/tsunami reconstruction is just what Japan needs to revive growth, we remain bearish on Japanese growth over the intermediate and long term. Despite Japan being very “cheap”, valuation, as consensus is finding out, remains no catalyst.


The economic grip around Japan’s Jugular is about to get incrementally tighter…


Darius Dale



Covering Japan… We’ll Be Back - 1

European Bank Swaps Shake

Positions in Europe: Short EUR-USD (FXE); Covered short EUFN (European Financials) today

Below is our European Financials CDS Monitor that is tracked weekly by our Financials Managing Director Josh Steiner and his team.  As we’ve noted in recent work, the rising spotlight on the sovereign health of Italy and Spain have sent bank stocks in both countries shaking. Announcements over the weekend from Spain and Italy to further tighten spending to reduce budget deficits and the ECB’s decision to re-activate its bond purchasing program (SMP) did little to quell investor fears today: European equities fell -2 to -6%, and most towards the latter end of the range. [For more see today’s note titled “European Risk Monitor: In the Red”].


While the “news” did send 10YR Italian and Spanish sovereign bond yields tumbling around 70bps day-over-day to 5.35% and 5.23% respectively, it’s clear that the ECB too is worried about bond yields creeping up in both countries. Our break-out yield target level remains 6%, which both have flirted around, even after the announcement of Greece’s second bailout on July 21st. 


As it relates to the banks, we see the 300bps (affectionately named the Lehman Brothers line) as a critical break-out momentum line. And here the score card is very telling. Currently 13 out of the 39 large European banks are trading over the 300bps line. If we focus on the banks of the peripheral countries, the majority of them are above 300bps, and a significant number have cleared the line by a country mile. We think many of these banks that defy the line are in serious risk of default. 


A breakdown of the monitor shows that bank swaps in Europe were mostly wider last week: 34 of the 38 swaps were wider and 4 tightened. 


Widened the most vs last week: Banco Popular Espanol (Spain), Svenska Handelsbanken, Barclays

Widened the least vs last week: Alpha Bank, EFG Eurobank, National Bank of Greece

Widened the most vs last month: Banco Popolare (Italy), Banco Pastor (Spain), Bayerische Hypo (Germany)

Tightened the most/widened the least vs last month: Alpha Bank (Greece), EFG Eurobank (Greece), Hannover Rueckverischerung (Germany)


Today we covered our short position in European Financials (EUFN) in the Hedgeye Virtual Portfolio for a 15.7% gain (see levels chart below).


European Bank Swaps Shake - 1. josh


European Bank Swaps Shake - 2. josh


Matthew Hedrick

Senior Analyst

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