We weren’t blown away by the quarter although it was decent. Management’s bullishness was surprising, even for MGM.



There is no love for gaming exposure and no love for leverage.  MGM has both.  So despite a decent quarter and a very favorable outlook, MGM is selling off this morning.  MGM’s not our favorite stock in gaming but if management’s forward looking commentary is close to reality, the stock will likely push forward.  Here is our analysis of the quarter and the outlook.



  • Despite being the high on the Street at $420MM of EBITDA, adjusted for hold and impairments at the residential division of CC, MGM beat our number by $2MM
  • Las  Vegas:
    • RevPAR growth was a little stronger than we expected.  Partly due to Q2 resort fees of $9-10 vs $6-9/day in 1Q.  Occupancy was also surprisingly stronger – so rate did not come at the price of occupancy
    • Despite higher RevPAR, EBITDA was lower than we estimated by $21MM.  The miss versus our number was likely due to lower than normal hold which management claims cost the Strip properties $27MM
    • The 3 properties that missed our EBITDA estimates by the widest margin were:  MGM Grand, Mirage and Luxor by 38%, 25%, and 15%, respectively
    • Mandalay and Monte Carlo beat our EBITDA estimates by 16% and 14%, respectively
    • Total property level expenses increased 4% YoY
      • NY NY, Mirage and Bellagio had the highest YoY increases in growth of 10%, 6% and 5% respectively
      • MGM Grand had the most controlled expense growth at 2%
      • All the other properties at expense growth of roughly 3.5%
  • The lower end properties had the best RevPAR growth. Despite strong RevPAR growth, 2 properties still had YoY declines in EBITDA – likely due to hold comparisons
    • Excalibur RevPAR increased 27% but EBITDA decreased 0.2%
    • MGM Grand RevPAR increased 9% but EBITDA decreased 32%. It looks like MGM Grand had very good hold last year
    • Since MGM reported positive income the $1.45BN of 4.25% converts were treated as dilutive to the share count per GAAP accounting rules  - hence the increase in share count.  [The converts are struck at $18.58 – you can either count them in the share count or as debt but not both.  We tend to treat them as debt until they are in the money]
    • City Center’s revenues were $22MM above our estimate but EBITDA was only $2MM better. Adjusting for $18MM high hold benefit, City Center continues to underwhelm us at a $33MM quarterly run rate.
      • Excluding residential, the revenue beat would only have been $16MM and the EBITDA beat would have been $5MM or ($60MM of EBITDA excluding residential and $42MM on a hold adjusted basis)
      • Net casino revenues were roughly flat QoQ or roughly $111MM
        • Estimated slot revenue $37MM
        • Estimated table revenue $80MM
          • Drop $285MM, hold of 28%
    • Rebate rate of 5%
  • $122MM of net non-gaming revenue
  • Total expenses increased $10MM QoQ to $180MM
  • MGM Macau total EBITDA was $9MM above our estimate while revenue $12MM better
    • Implied direct play was 8% vs. our prior estimate of 13%
    • Mass hold was quiet high at 27.5%
    • The slot win % was 5.6%
    • We estimate that fixed operating expenses increased to $82MM from $76MM in Q1



Management went so far to say the forward trends were “very positive”.  If they can achieve their projection of 10% RevPAR growth and generate gains in the casino as implied in their commentary, Q3 will be a strong quarter.  Here are some of the important forward looking takeaways:

  • “Our booking pace is so far up quite nicely for the summer and really throughout the fall period as well.”
  • “We expect RevPAR in the third quarter here in the Las Vegas strip to be up around 10%. We’re particularly encouraged in terms of second half of the year on our convention calendar, most notably the months of September and October; they’re exceptionally strong. And in fact, the third quarter convention mix is expected to be up about 300 basis points over last year’s mix.”
  • “The event calendar is also strong. The back half of this year is better than the first half”
  •  “…July we’ve been up and in fact we’re having a very solid time of the high end internationally.”
  • “I think the slot increases, though, are a function of a few things. One, overall general improvement  in the customer that’s coming to Las Vegas. We’re seeing across the board improvements in RevPOR, total revenue per occupied room; that translates well on the slot side. The mix has improved in terms of the room mix so as we’re driving more productive customers through the buildings, we’re seeing higher slot revenue”
  •  “In terms of looking at booking trends it had its biggest booking month in three years in the month of July. So in terms of booking new business, getting back to an earlier question, we’re seeing booking trends if anything have not fallen; certainly not in July, not here in August, but we’re seeing it accelerate in some of our properties.”
  • [Convention space in 2012]  “I think first four months is virtually sold out and Chuck doesn’t have any space more or less to really book any large piece of business at Mandalay
  • “We actually have 68% of our rooms booked for 2012”
  • “I think Aria is even pacing ahead of that in terms of 2012 this early in the game and our convention folks are pretty excited about the way ‘13 and ‘14 are actually shaping up.”



  • Casino net revenue increased 1% YoY
    • Table game revenue was down 5% YoY, partly due to an 85bps YoY decrease in table hold to below 19%
    • Table volumes were down 4% YoY
    • Slot revenues were up 5% YoY and 7% in Las Vegas
  • MGM Macau:
    • Gaming concession expires April 20, 2020 while the land concession is good through April 6, 2031
    • Company recognized intangible assets related to gaming promoter relationships with an estimated value of $180 million which will be amortized over their estimated useful lives of four years
    • MGM Grand Paradise’s tax exemption expires on Dec 31, 2011. An application for a 5 year extension is pending Macau government approval
  • Silver Legacy distressed situation:
    • “Has approximately $143 million of outstanding senior notes due in March 2012. Silver Legacy is exploring various alternatives for refinancing or restructuring its obligations under the notes. There can be no assurance, however, that it will be able to refinance or restructure the notes on acceptable terms, or at all. If Silver Legacy is unable to refinance or restructure its obligations with respect to the mortgage notes, the holders of the notes will be entitled to exercise the remedies provided in the indenture governing the notes, including foreclosing on the assets securing the mortgage notes.”
  • TTM EBITDA for Credit Facility covenant calculation purposes was $1.25BN at 2Q end vs a min required level of $1.1BN

  • There was $619MM funded on the CC completion guarantee and $18MM of estimated net obligation outstanding (including outstanding Perini litigation).  MGM recorded a $110MM receivable which represents amounts reimbursable to MGM from CityCenter from future residential sales






Valued Hedgeye Client:


The Hedgeye Macro Team, led by CEO Keith McCullough and Director of Research Daryl Jones, will be hosting a call this coming Wednesday August 10th at 11am EDT to discuss recent global market action and our key current risk management views.


Please note the time of the call is now 11am EDT, not 1pm, to allow our Financials Sector Head Josh Steiner to join us to provide a preview of the Bank of America call that will be occurring at 1pm.


Key topics we will be addressing: 

  • Does the SP500 off over 15% from its YTD highs present a short covering opportunity?
  • Given our outlook for the global economy, what are the key drivers over the intermediate term?
  • Sovereign debt issues and the likelihood of resolution, both in the United States and Europe.
  • Update of Hedgeye's quantitative and fundamental view of key assets classes - e.g. U.S. dollar, oil, gold, treasuries and copper.
  • Hedgeye's top macro and asset allocation ideas. 

Please contact  if you do not currently subscribe to out Macro vertical and would like to attend this conference and receive the materials. The materials and dial-in information will be automatically circulated the morning of the call to current Macro clients.


As always, we'll have a robust live Q&A session. If you'd like to submit questions in advance of or during the call, please email .


Please contact  if you have any questions.




The Hedgeye Macro Team 



Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.



Prior to founding Hedgeye Risk Management, Keith built a track record as a successful hedge fund manager at the Carlyle-Blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He got his start as an institutional equity sales analyst at Credit Suisse First Boston after earning his Bachelor of Arts in Economics from Yale University, where he captained the Yale Varsity Hockey Team to a Division I Ivy League Championship. Keith is also a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010). 



Prior to joining Hedgeye Risk Management, Daryl was the Sector Head for Basic Materials at HIG Capital's hedge fund, Brightpoint Capital. Earlier, Daryl founded the public investment effort at Onex Corporation, a leading private equity firm. At Hedgeye, Daryl covers commodities, geo-politics and major asset classes outside of equities.








Today, the ICSC chain store sales index posted its second straight decline, falling 0.5% in the latest week. Year-over-year growth moderated to 3.6%, its lowest level in five weeks.




Small businesses turned more pessimistic in July as the NFIB index fell from 90.8 to 89.9. The index has fallen for five consecutive months by a cumulative 4.7 points and puts the index below 90 for the first time since September 2010.

  • The net percent of small businesses planning to expand employment was 2%, compared with 3% in June and -1% in May.
  • Expectations for the economy to improve weakened, falling from -12% to -15% in July; this follows a sharp decline in June when expectations fell by 6%.



As earnings estimates continue to come in, Full Service continues to underperform.


THE HBM: WEN, MCD, SBUX, YUM, BWLD, TXRH, CAKE - subsectors fbr




  • WEN was reiterated Buy today by Deutsche Bank on improving brand positioning, discounted valuation, and sizeable cash position.
  • MCD was added to the Conviction Buy list at Goldman.
  • SBUX was raised to Outperform at Baird.
  • SBUX stores in New York City, at least the busy ones, have started blocking electrical outlets to discourage laptops users from taking up space for long periods of time.
  • YUM was raised to outperform at Baird.
  • On a relative basis the stock that outperformed yesterday were COSI, KKD, MCD PEET, THI, YUM, JACK and CMG.  MCD, PEET, THI and YUM stand out as being the best relative performers across multiple durations.



  • BWLD was initiated Overweight at Barclays.
  • TXRH was cut to Neutral at Baird.
  • CAKE was cut to Neutral at Baird.
  • On a relative basis the stock that outperformed yesterday were: CEC, KONA, DRI, PFCB and BOBE.  KONA and DRI stand out as being two of the best relative performers across multiple durations.



Howard Penney

Managing Director


Rory Green



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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


The Q was decent but the real story is the outlook. A typically optimistic management team was particularly bullish about the Strip prospects.



If you believe MGM management and its positive outlook is sustainable, MGM looks like it’s going higher.  However, the better play might be BYD.  If history holds, then improving Strip results should result in locals LV growth with a lag.  Someone on the sell side has to make that connection.  The BYD analysts only have room for upgrades, the stock is at a 52 week low and cheap on an absolute and relative basis, and cash flow is accelerating – even without the assumption of a LV locals recovery.


TODAY’S S&P 500 SET-UP - August 9, 2011


Markets around the world are crashing now. We define crash as a 20% peak-to-trough decline in price, but people tend to internalize crashes versus their own expectations. Given what consensus expectations for 2011 were based on, we’re not surprised.


The list of 2011 “CRASHES– from 2011 peak price: Greece = -43.9%, Italy -34.6%, Germany -25.6%, Financials (XLF) = -29.2%, Industrials (XLI) -23.7%... and now you are seeing daily emerging market moves of -8% (Brazil yesterday) to -12% (Romania this morning).


At Hedgeye we feel that waking up begging for Bernanke to arrest gravity is not a risk management process; away from cutting his US GDP growth estimates (again) today, what can he do? Buy bonds? They go up every day!


As we look at today’s set up for the S&P 500, the range is 102 points or -4.42% downside to 1070 and 4.69% upside to 1172.


The Hedgeye models have a 3 standard deviation level of support at 1070 SPX and since 2008, 3 standard deviation moves occur frequently. Covering shorts on the down move, not busting out the gross long guns. At 1070, maybe!






THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -3608 (-1565)  
  • VOLUME: NYSE 2543.62 (+12.85%)
  • VIX:  48.00 +50.00% YTD PERFORMANCE: +170.42%
  • SPX PUT/CALL RATIO: 2.04 from 2.59 (-20.99%)


  • TED SPREAD: 23.92
  • 3-MONTH T-BILL YIELD: 0.05% +0.04%
  • 10-Year: 2.40 from 2.58    
  • YIELD CURVE: 2.13 from 2.30


  • 7:30 a.m.: NFIB Small Business, est. 89.9, prior 90.8
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 8:30 a.m.: Non-farm productivity, est. (-0.9%), prior 1.8%
  • 11:30 a.m. U.S. to sell $35b in 4-wk bills
  • Noon: DoE short-term energy outlook
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 2:15 p.m.: FOMC Rate Decision
  • 4:30 p.m.: API inventories


  • S&P cuts the AAA ratings of thousands of municipal bonds tied to the government, including housing securities and debt backed by leases
  • U.S. home values had their smallest decline in more than 4 years in 2Q, as the share of borrowers with negative equity shrunk, Zillow says
  • China’s inflation climbs 6.5% in July, the fastest pace in 3 years



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Advances to Record as Equity Rout Stokes Investor Demand
  • Crude Falls to 10-Month Low in New York; Brent Dips Below $100
  • Hay Sent to China Cheaper Roiling U.S. Dairies: Freight Markets
  • Oil Supply Rises in Survey on Reserves, Imports: Energy Markets
  • Copper, Aluminum, Lead Climb on Intervention Hope After Slump
  • Commodities Slump to Eight-Month Low as Slowdown Erodes Demand
  • Rice Futures in Tokyo Jump by Daily Maximum on Radiation Fears
  • Aquila CEO Says ‘Dozens’ Are Studying Coal Acquisition
  • Copper Output in China Advances to Record as Aluminum Drops
  • Palm Oil Drops to 9-Month Low as Slowdown May Reduce Demand
  • Gold Rises to Record as U.S. Rating Cut Spurs ‘Heavy’ Buying
  • Texas Dust-Bowl Redux Spurs Record U.S. Cotton Loss, Farm Claims
  • Corn Drops to One-Week Low as ‘Gloomy Economy’ May Lower Demand



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: looking on the bright side, provided you aren't long Romania (down -12% this morning)

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: KOSPI down the most of the majors (ex HK), down -3.6% and -19.2% since MAY, proving once again that governments should just get out of way
  • China stopped going down last night - that’s as critical an indicator of support as there is in Asia; Australia stocks followed that higher
  • CHINA – the data was fine with JULY inflation data (CPI) all but assured to be the high for 2011 YTD; Chinese stocks stopped going down last night on that news and that’s the 1stmarket we buy in global equities; not Germany or USA

 THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

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