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The Macau Metro Monitor, October 17, 2011




The number of tables in Macau increased by 142 QoQ to 5,379.  Slot machines increased by 802 to 15,900.  VIP baccarat accounted for 74% of total GGR.



Singapore new private home sales surged 21% MoM to 1,631 homes.



LIZ: NewCo is Just Getting Started


To say that interest in LIZ has picked up since the company announced it sold another $328mm worth of assets last week is an understatement. We expect more of the same in the coming weeks. We think the stock’s 50% move this week is not the culmination of the company’s 3-month transformation, but rather that it’s just the beginning of a more sustainable and less volatile move higher from here over the intermediate-term TREND and longer-term TAIL duration.


So let’s put some figures into perspective given the company’s shift from a leveraged/consolidating/profit losing stock to a growth stock with what we expect to be a growth multiple virtually overnight:

  1. For starters, $471mm in asset sales over the last 3-months will drastically reduce LIZ’s debt position by more than 60% from $769mm at the end of Q2 by the time these sales are completed by year-end. Moreover, the company will have enough cash to settle its Eurobond in full, but more importantly eliminate related Fx hedges that have created considerable volatility on the P&L.
  2. With Mexx and a basket of tertiary brands no longer holding back the company’s Domestic Direct Brands (Juicy, Lucky, and Kate), we expect ‘the company formerly known as LIZ’ to post low-to-mid teen top-line growth.
    • More specifically, we assume the wholesale jewelry (what’s left of Partnered Brands) is roughly a $75-$80mm business growing at a LSD-MSD rate.
    • Coupled with ~14% top-line growth in the remaining Direct Brands, we expect the company to post 13% revenue growth in 2011 as pro-forma financials become available over the next two quarters followed by 12% and 15% growth in 2012 and 2013 respectively.
  3. Gross margins will also see a significant boost from historic levels. LIZ has posted margins of 46.7% and 49.9% in each of the last two years. The margin profile looked something like this – Mexx at 51%-52% and Partnered Brands at 35-38% compared to Direct Brands at 55%.
  4. SG&A is the biggest variable in “NewCo’s” P&L. While we know the SG&A associated with the Direct Brands – which has been fully allocated –the addition of a corporate expense line due to some residual overhead expenses was suggested on the most recent call. While we are building in nearly $25mm in Partnered Brand related SG&A, this is one of the key questions heading into earnings on November 9th as management looks to reduce costs. Ideally, all costs associated with the sold off assets would be eliminated along with them, but it sounds like we might see at least a few quarters of further ‘streamlining’ as NewCo takes shape.
  5. With net debt down to $270-$290mm by year end (i.e. total debt ~$300mm), we’re modeling interest expense of $27mm and $23.5mm in ’12 and ’13 reflecting a blended rate of 9.2% (comprised of senior secured at 10.5% and convert at 6%).
  6. Tax Rate is likely to shake out at ~35% particularly with the sale of Mexx. However, near-term the company doesn’t expect to be a cash tax payer given its NOLs. This is another item that we expect to have greater clarity on once the Mexx deal is complete – we expect before Nov. 9th.
  7. Lastly, we have to consider the potential impact of the $90mm convert (due 2014), which can be settled in either stock, cash, or some combination therein. The maximum conversion if settled in all stock would be 25.1mm shares. We expect the company to pay some portion (if not most) in cash, which would reduce the dilutive impact if shares were called.

All in, we’re shaking out at $0.47 and $0.84 in 2012 and 2013 EPS respectively, which could translate to $0.40 and $0.69 assuming the maximum possible dilution from the convert. On an EBITDA basis, we’re at $165-$170mm in 2012 compared to updated guidance of $130-$150mm. With roughly $75mm in D&A and ~$10mm in EBIT generated from what’s left of Partnered Brands (wholesales jewelry business and QVC royalty), the company’s updated guidance implies Direct Brands EBIT of $45-65mm. That appears too low, if not – dare we say – down right conservative. We expect Kate to generate $58mm in EBIT alone. With Lucky at breakeven and Juicy EBIT margins of 4%, we’re coming out at ~$85mm in Direct Brands EBIT.


Based on the company’s 2012 outlook the stock is trading at 6.5x-7.5x EBITDA and ~6x our numbers – for 2013, you’re looking at ~4x. That’s 9x earnings, and a Free Cash Flow Yield of about 15%.  Not bad at all – especially when the largest profit center (Kate) is growing sustainably at 35%+. While management’s credibility in meeting – let alone beating – expectations is virtually nil, it appears that McComb is finally setting the bar low enough to beat. This one is just getting started.


See our September 13th Black Book on LIZ (Get In While You Can) for our full investment thesis.


LIZ: NewCo is Just Getting Started - LIZ NewCo Estimates 10 11


Casey Flavin


Buying Things Well

This note was originally published at 8am on October 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Investment success doesn’t come from buying good things, but rather from buying things well.”

-Howard Marks


In Chapter 4 of Howard Marks’ “The Most Important Thing” he discusses a very hot topic at our Yale campus headquarters these days – the relationship between price and value.


American shoppers tend to get this concept much more readily than some American Institutional Investors do. Why? Probably because Americans shop using their own money as opposed to other people’s money. A subtle difference that focuses the mind.


Rather than opining on why I’ve been bearish on the “buy stocks because they are cheap” thesis since the February-April 2011 highs, I’ll submit one more concise thought from Marks that summarizes the crux of the matter:


An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.” (The Most Important Thing, page 23)


Back to the Global Macro Grind


Today, I’ll probably “sound” as bearish as I sounded bullish covering shorts last Tuesday. Plenty of people can’t reconcile how someone can be that way. They didn’t teach us how to be Duration Agnostic on a Keynesian campus, thankfully.


Plenty of people like to label people in this business too. That’s usually easier than taking the time to understand what it is that they do. We get it. This is Old Wall Street, until it isn’t.


On Wall Street 2.0, there will be Time Stamps.


To review, Hedgeye has made 3 “Short Covering Opportunity” calls in the last 2.5 months:

  1. August 8th
  2. September 12th
  3. October 4th

These were accurate immediate-term TRADE opinions about the relationship between price and value. On October 3rd, the Hedgeye Asset Allocation Model held a 73% position in Cash. On October 11th (before yesterday’s open), my Cash position was 61%.


On Old Wall Street 1.0, there are no Time Stamps. That’s dying on Opacity’s Vine.


Fully Occupied Transparency comes next.


Why be bullish, on the margin, before an +8.7% short squeeze, and be bearish, on the margin, after it? Price/Value matters – and everything about managing risk in a Globally Interconnected Macro market happens on the margin.


I wrote about being multi-factor and multi-duration as a matter of process yesterday. Nothing has changed on that front today. Across my Top 6 Global Macro Factors (and across durations), here’s what I see this morning:

  1. SP500 = bullish TRADE (1167); bearish TREND (1228) and TAIL (1266)
  2. VIX = bearish TRADE; bullish TREND and TAIL
  3. German DAX = bullish TRADE; bearish TREND and TAIL
  4. EUR/USD = bullish TRADE; bearish TREND and TAIL
  5. Copper = bearish TRADE, TREND, and TAIL
  6. 30-year US Bond Yields = bearish TRADE, TREND, and TAIL

So if those who are paid to think in a marketing vacuum want to call me Rosie or Roubini, they can whisper amongst themselves and have at it. No Duration Differentiation. No Real-Time Risk Management.


If you are reading this today, you’re paying for my rants … and on behalf of my research team, I sincerely thank you for having an open mind. We couldn’t Occupy Hedgeye without you.


Having been bearish in 2011 doesn’t mean we can’t help you buy “good things” well. We bought Starbucks in April of 2009 when no one wanted to touch it – that’s an American brand that means something, and will continue to for a long time.


In the last few months we’ve also bought Utilities (XLU), Target (TGT), and Marriott (MAR) well. These are 3 of the 10 LONG positions we have in the Hedgeye Portfolio that do stand the chance of actually being held for the “long-term.” Good balance sheets, dividends, and, most importantly, bought at good prices.


We get Graham and Dodd. It’s not that complicated, really. Buy low. But we also get Buffett and Munger’s #1 rule of investing that supersedes all of the vaunted “value” investing rules – DON’T LOSE MONEY.


Oh, and their second rule of investing is don’t forget rule #1.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1646-1684, $84.42-89.71, 5614-6069, and 1167-1212, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Things Well - Chart of the Day


Buying Things Well - Virtual Portfolio

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Our Oct GGR forecast revised to $24.5-25.5BN, representing 34-39% YoY growth.



Macau slowed considerably this past week which is to be expected following Golden Week.  Average daily table revenues fell to HK$553 million this past week versus HK$1,085 million during the first 10 days.  We are unsure yet if hold played any role.  Our full month GGR October forecast is now HK$24.5-25.5 billion, which would represent YoY growth of 34-39%.


No unusual market share moves this week other than Galaxy giving up some of its share and MGM gaining.  However, overall market shares look consistent with recent trends.  



CHART OF THE DAY: Practitioners vs Professors


CHART OF THE DAY: Practitioners vs Professors - Chart of the Day

Practitioners vs Professors

“Policy is the name we give to our future mistakes.”

-Henry Wallich


The late Henry Wallich (1988) was an economist, central banker, and Yale professor. He served under Eisenhower and was also a prolific columnist for Newsweek who was well known for his ability to connect with the common American citizen. He was accountable and accessible.


Yale University hosted a “Panel Discussion on the US Economy - How Do We Create More Jobs” last week that caught a lot of us in the ranks of Yale Alumni off guard. It wasn’t so much Yale’s esteemed James Tobin Professor of Economics, John Geanakoplos, suggesting that we “try inflation as a policy” that would have Wallich rolling over in his grave, as it was the glaring amount of partisanship on the panel.


To challenge the Yale Economics Department formally to a debate would be challenging the perceived wisdoms of Big Government Interventions and Keynesian Economics on their merits – so I will.


For those of you who have not already seen this Panel Discussion, here’s he link (http://www.livestream.com/yale/video?clipId=pla_f32b7225-59a0-4fde-a739-77a126efa107&utm_source=lslibrary&utm_medium=ui-thumb)  and my notes:


1.   Richard Levin - opens by saying “we did not stimulate enough”…  and goes on to suggest the US government should have acted as boldly as the Chinese did (which is interesting in and of itself, given that’s not a democracy). Levin thinks it’s “simple” - if we spent even more tax payer moneys, we’d have been fine. This is the Paul Krugman school of thought. Period.


2.   William Nordhaus – says the word “occupy” is the wrong word – he thinks it sounds like the “West Bank.” In terms of “substance”, he says “even if they are right”, it won’t work unless they have “well defined policies” (again assuming that all Americans think more policy is the answer to America’s problems, as opposed to less).


Nordhaus, like Levin, thinks Obama is right and we need a “jobs bill times 3” and “need to stop attacking the Federal Reserve.” He states plainly that any other idea is “partisan” (implicating himself as partisan). He addressed trivial points like the Gold Standard saying “give me a break … come on over to econ 122 and we’ll have a discussion.”


3.   Robert Shiller – starts by saying “every crisis is an opportunity… I have written 4 books… and now I have 10 minutes to talk”… “I think we should be improving our financial markets by democratizing and humanizing” (through Dodd-Frank type reforms – i.e. more policy)…


On the Jobs Bill (that was filibustered), I like to focus on “all the good things that were in that bill… building bridges and highways, hiring teachers and policemen, etc… but it seems to have a budgetary problem… in that it would raise the national debt”… “especially in times like this when we are in near depression- we need a balanced budget multiplier” (a Paul Samuelson theory from the 1940s)


4.   Aleh Tsyvinski – clearly the outlier – younger and more globally oriented in his macro thoughts (refreshing). Said what worries him in general is the “short-term focus on today’s crisis” as opposed to focusing on the “longer-term context” of large Keynesian experiments like Japan. “I am afraid we are on the verge of something much bigger and problematic in terms of long-term US economic growth.”


“Part of our employment problem has to do with the failure of policy… the theory of the multiplier effect didn’t work…” Says a lot of what we’re focusing on creating with policy could make the US economy look like Europe – slow growth, higher unemployment. “They put a lot pressure on politicians to act… but the overall objective should be long-term economic growth.”


5.   John Geanakoplos – “the occupy wall st movement will be a prelude to bigger riots”… Yale campus was in riots in 1, “when I was here in 1975, we missed the revolution… but we may have another chance!”


He wants to build bridges and allow for principal forgiveness (mortgages) – but he doesn’t want to just triple the size of the spend – he wants to “plan” for it. “Most economists didn’t predict any of this… the fact is that they got it all wrong…” … “so there’s something wrong… there’s something missing from our macro economics and our federal reserve process because they don’t focus on leverage…”




Levin summarized the panel’s ideas as follows: A) short term problem = full employment B) short term problem = housing C) long-term problem = economic growth. And we can solve for all of these with MORE of what didn’t work! Short-term, focus on infrastructure and “double down.” Short-term, focus on mortgage forgiveness. Long-term we need a balanced budget (which you cannot do if you do A and B) and raise taxes.




I think my daily strategy notes for the last 4 years and, more importantly, accurate forecasts in calling the last 2 major Growth Slowdowns (2008 and 2011) serve as ample repudiation of Keynesian Economics. That said, I think the most transparent and accountable way to have a rebuttal to all of the aforementioned academic dogmas gone bad is to have an open public debate.


There are 9 Yale grads on my team who would love an opportunity to explain how some of our undergrad “economics” teachings have failed our country in the real world. We can call the debate “Practitioners versus Professors” and I think anyone who’d like to find room to occupy a bi-partisan debate in their thought process will come out smarter having heard both sides.


My immediate-term support and resistance ranges for the Gold (back above its TREND line this morning), Oil (failing at its TREND line of $89.18), the German DAX, and the SP500 are now $1, $84.18-89.18, 5811-6192, and 1179-1242, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Practitioners vs Professors - Chart of the Day


Practitioners vs Professors - Virtual Portfolio

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