Fighting the Bull

“Bullfighting is the only art in which the artist is in danger of death and in which the degree of brilliance in the performance is left to the fighter's honor.”

-Ernest Hemingway


Keith and a few other members of our senior management team are up at the Pop Tech Conference in Camden, Maine, and as a result I’ve been handed the proverbial hockey stick on the Early Look this morning.  Given that one of the last major Republican primary debates occurred last night, I wanted to touch upon a topic that we all have an opinion or view on: politics.


The most noteworthy news in the Republican political arena in the last few weeks has been the startling decline of Texas Governor Rick Perry.  According to the Real Clear Politics poll aggregate, on September 13th, Perry was at 31.8% in a poll of the major candidates, while Romney was at a distant second with 19.8%.   As of yesterday, Perry’s support had declined dramatically to 12.9%.  As the public has seen more and more of Perry in televised debates, they have seemingly become less and less comfortable with his ability to be President of the United States. 


Last night appears to have been Perry’s best debate showing, though this largely came on the back of a more personal attack on former Massachusetts Governor Mitt Romney related to hiring illegal aliens in his home.  Specifically, Perry stated:


“Mitt, you lose all of your standing from my perspective because you hired illegals in your home.  And you knew for — about it for a year.”


Perry has actually been effective at raising money in this race and according to recent reports currently has more money on hand than Romney.  Money aside, though, Perry appears to have outworn his welcome on the national stage and attacks like the one above are starting to reek of desperation.


Alongside Rick Perry’s rapid decline, the other key surprise in Republican circles has been the rapid ascent of Herman Cain.  In the aforementioned poll aggregate from Real Clear Politics, Herman Cain has gone from barely registering, at 4.2%, to now running a close second to Romney with 23.4% support amongst the Republican field.  As we wrote about Herman Cain a few weeks ago to our Macro Subscribers in a post titled, “This Isn’t Herman Cain’s First Rodeo (Though It Could Be Rick Perry’s Last):


“In the current race for the Republican nomination, Cain has quickly gone from being a long shot candidate to being considered a serious candidate.  This has occurred on the back of a number of straw poll victories, including Illinois, Florida, and at the National Federation of Republican Women.”


Unfortunately for Cain, it all seems like too little too late.  Currently Romney has the fundraising and organizational advantage, as well as the advantage of being a known entity, for better or worse, to voters, so his potential of imploding has limited.  The InTrade market for political futures, which we flagged in the Chart of the Day today, reflects as much about Romney in a 65% probability that he will be the nominee.


On the Democratic side, of course, stands the incumbent, President Barack Obama.   To say Obama is in a world of hurt, currently, would be an understatement.  According to the Real Clear Politics Aggregate, Obama’s approval rating is 43.6% and his disapproval rating 52.0%.  His re-election chances are further thwarted by the fact that unemployment stands at north of 9%.  No incumbent in the history of the U.S. Presidency has been re-elected with approval and economic numbers this abysmal.


On the positive, President Obama still seems to be moderately well-liked.  In fact, despite the extremely negative numbers outlined above, Obama still outpolls all of his potential Republican challengers on a head-to-head basis.  Romney is by far the closest, but still trails by 0.6%.  So, while Obama is down, he is far from out. 


That said, the key missing factor in head-to-head polls is a measure of enthusiasm to vote.  According to a recent CNN poll, some 64% of Republicans say they are extremely enthusiastic to vote compared to only 43% of Democrats.  If this trend sustains, it will be the Republican nominee by a landslide.


The emerging wild card in this race appears to be the Occupy Wall Street movement.  I’ve spent a fair amount of time both researching the movement and visiting their headquarters in Zuccotti Park.  The mainstream media, especially CNBC, has certainly been validating this group with exposure, but so far, to me at least, it is very unclear that this group has the organizational skills or money needed to make an impact.


As well, even if the group does appear, so far, to represent largely leftist interests, they do represent a broad discontent with American elites both on Wall Street and in Washington.  Despite a lack of real leadership, Occupy Wall Street has flourished geographically.  Occupy Wall Street, ultimately, may be a leading indicator that the door remains open for a truly tenable independent candidate to run for President.   Who the candidate would be and where he or she would come from, though, remains to be seen.


I do have a recommended skill set for any third party candidate that enters the Presidential ring, which is that of bullfighting.  Ironically, a good friend of mine from home, Jason Hale, is taking on the political establishment in Alberta in a race for the Provincial legislature and, as you can see from his bio - - he has 10 years of professional bull fighting experience.  Not a bad skill set to have with all the bull in politics these days.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fighting the Bull - Chart of the Day


Fighting the Bull - Virtual Portfolio


We’re expecting a solid Q3 report.  What limited visibility there is should be positive.



We expect Starwood to report $237MM of EBITDA and EPS of $0.40 – about 2% ahead of consensus and a little higher than the high end of management guidance for EBITDA.  That, in and of itself, should be a positive but it will really come down to guidance.  We recognize that visibility is not high and management can afford to be conservative given the low valuation and uncertain macro environment.  However, we expect the commentary to be positive.  Lodging fundamentals continue to look more favorable to us than domestic gaming and leisure. 


Here are our Q3 projections:



Q3 Detail

  • 3.8% increase in system-wide rooms
    • 5.7% increase in franchised rooms and 4% increase in managed rooms
  • $437MM of owned, leased, consolidated JV and other revenue and $89MM gross margin
    • $278MM of room revenue, up 2% YoY on a lower room base offset by higher RevPAR
    • $159MM of F&B revenue, up 3% YoY and seasonally down $3MM QoQ
    • CostPAR of $256.54 up 4% YoY  compared to an 8.6% increase last year
  • $193MM of fee and other revenue – driven by system-wide room and RevPAR growth
    • $157MM of management and franchise fees, up 14.6% YoY and in-line with the high end of HOT’s guidance
      • $77MM of base fees, a 15% YoY increase
      • $30MM in incentive fees, up 10% YoY
      • $51MM of franchise fees, up 18% YoY
    • $30MM of amortization of deferred gains and termination fees and $6MM of other revenue
  • $146MM of VOI and residential revenues and $35MM of operating profit – with similar top line growth and margins as 2Q11
  • Other stuff:
    • SG&A: $95MM
    • D&A: $67MM consolidated; $10MM unconsolidated
    • Net interest expense: $53MM; $4MM unconsolidated


The Macau Metro Monitor, October 18, 2011




Secretary Tam said, “I have repeatedly stressed that before 2013 the [maximum] number [of gaming tables] will be 5,500. The  average growth in the total gaming tables will be kept at three percent over ten years after 2013. The government has set a clear policy [for the gaming industry] and at this moment, we see no any special situation that would lead us to change the current policy.”


Tam added that the gaming operators had indeed submitted a number of applications to the government for in increase in the number of gaming tables after the cap was announced.  “However, a social consensus has been reached in Macau that the size of the gaming industry can not be limitless and the government will follow this consensus. I believe that the gaming operators would not want to act against the common wish of the public,” Tam said.

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Keith shorted WYNN in the Hedgeye Virtual Portfolio heading into Q3 earnings.



Keith shorted WYNN in the Hedgeye Virtual Portfolio at $137.40.  According to his model, there is TRADE and TREND resistance 3% and 6% above his entry level, respectively. 


As we mentioned in our 3Q preview note yesterday, we don't believe WYNN's Q3 report will set off any fireworks.  The Street is already expecting a special dividend and while the announcement of one could boost the stock temporarily, we wouldn't be surprised to see investors sell on the news.  Going forward, Macau market share declines in both VIP and Mass and fears of a China slowdown could keep the stock in check.






TODAY’S S&P 500 SET-UP - October 19, 2011


Another day and another rumor that France and Germany has it all figured out.  We see bigger problems ahead.  As we posted yesterday, “FRANCE IS GOING TO GET DOWNGRADED and we continue to be Short EUR-USD (FXE).  France’s credit rating is going to get downgraded – now the question is when, and what becomes of the EFSF? 


As we look at today’s set up for the S&P 500, the range is 43 points or -2.40% downside to 1196 and 1.11% upside to 1239











  • ADVANCE/DECLINE LINE: +2074 (+3961) 
  • VOLUME: NYSE 1085.27 (+19.85%)
  • VIX:  31.56 -5.48% YTD PERFORMANCE: +77.80%
  • SPX PUT/CALL RATIO: 1.64 from 2.05 (-20.21%)




  • TED SPREAD: 39.39
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.19 from 2.18     
  • YIELD CURVE: 1.91 from 1.90


MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage, prior 1.3%
  • 8:30 a.m.: Consumer Price Index, M/m, est. 0.3%, prior 0.4%
  • 8:30 a.m.: Fed’s Rosengren speaks at Boston Fed conference
  • 8:30 a.m.: Housing starts, est. 590k, prior 571k
  • 8:30 a.m.: Building permits, est. 610k, down 2.4%
  • 9 a.m.: Fed’s Lockhart speaks on Latin America in Atlanta
  • 10:30 a.m.: DoE inventories
  • 2 p.m.: Fed Beige Book
  • 4:30 p.m.: Fed’s Lockhart speaks on leadership in Atlanta


  • Apple shares drop after missing 4Q sales, EPS est.; Apple says 1Q will be best yet for iPhone sales
  • Consumer prices probably climbed 0.3% in September, smallest gain in three months, economists est. ahead of today’s report
  • UAW ratified proposed contract with Ford, largest UAW-Ford Local 600 in Dearborn said last night
  • President Obama wraps up bus tour of North Carolina, Virginia
  • Day two of Western Republican Leadership Conference in Las Vegas, with Republican presidential candidates among speakers

COMMODITY/GROWTH EXPECTATION                                             


OIL: gets squeezed right back up to our intermediate-term TREND line of resistance of $89.12 WTIC.  

We shorted shorted OIL yesterday





  • Nespresso Customers Cheat on Clooney in Coffee Wars: Retail
  • Most Accurate China Analyst Sees No Sudden Policy Easing
  • Sugar Shortages Pummel Europe as World Glut Grows: Commodities
  • Maersk Shareholders Suffering With Too Many Containers: Freight
  • Bakken Turns Oasis Into Target as Fracking Costs Slide: Real M&A
  • BNP Paribas Sued by U.S. Over Banker’s Alleged Role in Fraud
  • Oil Trades Near Highest in a Month as Goldman Sees ’Upside Risk’
  • Gold Falls for Third Day as Rescue-Fund Report Limits Demand
  • CFTC Votes 3-2 to Approve Limits on Commodity Speculation
  • Copper Drops for Third Day as Europe’s Crisis May Curb Demand
  • De Beers CEO Says Diamond Prices May ‘Stick’ After 35% Gain
  • Years of Wal-Mart Violations Forced China Action, Official Says
  • Soybean Imports by China May Jump 22%, Noble Group Says
  • Rice May Rally on Thai Floods, State Buying, Sumeth Says
  • Vale May Discuss Iron-Ore Price as Clients Seeks Better Deal
  • Singapore Exchange Iron-Ore Swaps Post Record Daily Volume
  • Oil Trades Near Highest in a Month as Goldman Sees ‘Upside Risk’
  • COMMODITIES DAYBOOK: Copper, Oil Fall on Global Growth Concern
  • Wheat Gains a Fourth Day as Cold Weather May Hurt Russian Crop
  • Copper Drops as China, Europe Dim Demand Outlook: LME Preview








EUROPE: continues to see support at the TRADE lines in the DAX, CAC, MIB, etc; people are scared to be short the bazooka, rightfully






ASIA: mixed moves with HK recapturing its TRADE line of 18245 support as China continues to fall (down another -0.25%)








The Hedgeye Macro Team

Howard Penney

Managing Director


In preparation for WYNN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Palo Real Estate Company (owned by Wynn) and Wynn Macau to develop ~51 acres of land on Cotai.  The resort will contain a five-star hotel, gaming areas, retail, entertainment, food and beverage, spa and convention offerings on Cotai.  
  • Palo will pay a land premium of MOP1.55 BN and rental fees of MOP6.17MM to the government.  The first payment towards the land premium will occur in the form of a down payment of MOP500,000,000 (approximately HK$500,000,000 or US$62,500,000) and the balance will be paid in 8 additional semi-annual payments beginning six months from the date the Land Concession Contract is published in the official gazette of Macau.
  • Palo will lease the Cotai Land from the Macau Government for an initial term of 25 years, with the right to renew the contract


YOUTUBE from Q2 earnings call



  • [Wynn Macau margin] “With increasing volumes, the margins are definitely going up, and on the VIP side, with our increasing individual program win, we’re seeing higher margins in VIP. We’re also seeing higher margins in the mass casino as we’re winning more in the mass casino. And it’s really across the board. So the 30% to 32% EBITDA margin for Wynn Macau feels very comfortable for us, we’ve been there for about three quarters in a row now and that’s about what I would expect.”
  • “Basically, it’s the same customer.  We have less equipment on the floor so that’s what’s going to drive up the win per unit….Quarter over quarter, we’re 12% down in equipment and 40% up in win. And the market obviously grew a lot. We just got our fair market share."


  • “July, based upon our expectations, was going to be the worst month of the year. And we were going to experience soft midweek occupancy, and the weekends were going to be better, but July was the black hole. August, as conventions pick up with Magic show and the others around the end of the second week or the second week of the month, then we build momentum and we head into October where we’re sold out at much higher room rates, as you noticed, this year. And so we’ve been surprised in July by a better occupancy than we had thought. But what was surprising about it was that it showed up in the last two or three days, really late bookings this year in July. We’ve been picking up an extra 5 or 6 points of occupancy and in some cases, we went to full occupancy. It surprised us.”
  • [July] “had much higher rate over last year”
  • “October is going to be a dynamite month. We don’t have an inch of convention space that we can still sell.”
  • “Domestically, we’re seeing the same business in ‘11 as we did in 2006 and 2007. The big increase in 2011 has been our international business, because our brand is growing in China, people are recognizing Wynn, so when they travel to America, the place they go to is Wynn. So we’re seeing a much broader market internationally….China represents over 75% of the international mix change.”
  • “I think we have 11 or 12 villas that are being finished next month in the month of August. But we just finished $100 million worth of remodeling and another $100 million of additions and improvements.”
    • “We’ll also have more rooms available because we were doing the remodel in most of ‘10….that’s 400 or 500 rooms here.”
    • “So for 2012, we’re tracking on pace with where we were in 2011 for room nights. We’re obviously pushing a little rate. But we think it will be a good convention year in 2012….upside would be from price.”


  • “If we were ever given the chance to be in business in Singapore, we’d be thrilled and delighted to bring our best work there.”
  • “Wynn Resorts has debt of zero, and has had a debt of zero for several years. And we intend to keep it at zero. We have all the capacity to do any deal we want. See, by having a lot of cash in the parent, we can go to a new jurisdiction, infuse a subsidiary with a prudent amount of equity, make an intelligent loan that has got a reasonable ratio to the project cost, have low interest rate with long maturity, so we don’t get in the kind of trouble that our neighbors up the street have gotten into trouble on a couple of occasions.”

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