We knew hold was favorable but didn’t know the mix was unfavorable – the downside of rolling junkets.



Galaxy’s results fell short of our estimates but was in-line with consensus.  While Starworld and Galaxy Macau held higher than normal and we knew that going in, both properties held worse on the rolling junkets and than on the revenue share junkets.  That hurts profitability.  Unfortunately, junket hold mix is impossible to discern unless management tells you. 


For Galaxy Macau, unfavorable mix negatively impacted results by HK$60MM.  For Starworld, we believe that the impact was at least as high unless expenses rose.  So until we get more information on Starworld, we think that if not for unfavorable mix, the Adjusted EBITDA number would have been between HK$1.9-2.0BN – still below our estimate but better than Street’s.





Starworld reported revenues spot in-line with our estimate, but Adjusted EBITDA fell 14% short or HK$123MM from our estimate.  Management stated that the mix of VIP hold was unfavorable in the quarter.  We can only guess that the impact was around HK$100MM unless expenses and or promotional activity shot up sequentially.

  • Gross gaming revenue was HK$16MM (0.3%) above our estimate while net gaming revenue was HK$34MM higher (1%)
    • VIP gross win was in-line with our estimate
    • Rebate/commission rate was 45% or 1.46%, slightly lower than what we had estimated
    • Mass win was right in-line with our estimate.  Drop was a bit light but hold was better.
    • Slot win was HK$6MM lower than our estimate due to lower handle and a slightly lower win rate
  • Reported hold of 3.2% was obviously higher than theoretical – however, everyone knew that going into the quarter (especially the HK analysts) and knowing that the mix was unfavorable makes analyzing the impact of normalized hold on the quarter moot. 
  • Implied fixed expenses came in HK$142MM higher than we estimated at HK$517MM vs. estimated fixed expenses of $330MM last quarter and $1,325MM in 2010.  We can only guess that the majority of this increase is due to unfavorable hold mix.

Galaxy Macau reported revenue that was 2% below our estimate and EBITDA that was 18% lower.  Adjusted for unfavorable mix, Adjusted property EBITDA would have been HK$1,030MM vs. our estimate of HK$1,188MM.  The fixed operating expenses at the property were much higher than they appeared to be in 2Q11.

  • Gross win was 3% lower than we estimated due to lower direct play levels.  In the first quarter of operations, direct play was about 4% at GM. This quarter, there was less than 1% direct play at the property.
    • The rebate/commission rate was 40.3% or 1.2% - lower than the all in rate we estimated (note that this doesn’t include comped non-gaming revenues)
    • Mass revenues were in-line with our estimates although drop was lower and hold was better
    • Slot revenues were 9% higher due to better handle
  • Net non-gaming revenue was HK$39MM lower than we estimated
  • Fixed expenses were HK$125MM higher than we estimated

Other stuff:

  • City Clubs changed their reporting to just fee income so going forward, revenue and EBITDA will be the same.  City Club EBITDA was HK$5.5MM lower than we estimated due to lower volume and low hold as we had noted.
  • Construction materials EBITDA and revenue was a lot better than we expected.  We have no special edge here.


Coming into the quarter our thesis on BWLD was based on accelerating inflation and slowing sales trends.  In part we were right to be concerned, but our checks did not suggest that lunch was strong as it was.


That being said, BWLD’s incremental traffic is coming in at lower margins as it is associated with increased discounting.  So what is the right answer?  Was it a great quarter that the sales headlines suggest or should we raise the red flag on trends that are unsustainable?  Headlines are important, but BWLD is now going to experience what the rest of the industry has become so accustomed to: significant inflation.  For me, there is enough here from an inflation stand point to merit concern about the sustainability of current trends.


At the very least, the endless wing promotion will never be replicated given the trends in wing prices.    The company was right to “give something back to the consumer” given the significant decline in wing prices.  What happen to margins in the next six months when wing prices could be up 10-20%?  The $3.00 appetizer that is a different story and is a permanent reduction in margin that they can’t get back, unless they raise the price, but then the traffic goes away.


Here are our Top Takeaways from the quarter:

  1. Food inflation accelerating and discounting adding to COGS.  Traffic was driven by $3.00 appetizers and drinks during Happy Hour and the unlimited wings lunch promotion.  The appetizers are generating significant traffic at the happy hour time (not sustainable over the long term). 
  2. Unlimited Wings added to cost pressures, but it did end in September so it won't be around for 4Q11. Wing prices are headed higher!
  3. Same store sales were strong at 5.7% in 3Q compared to 2.6% last year; menu priced increases about 1.4%. Average weekly sales increased by 11.4%, exceeding same store sales percentage by 570 basis points.
  4. The NBA does not drive customer traffic.
  5. Menu pricing is running at about 1.5% and most of that would roll off in 1Q12.  BWLD is looking at a 2% menu price increase in 2012; they will make a decision on that in November and roll it out with the menu update in the first quarter.
  6. Tax rate significantly lower in Q3, was 28.1% vs. 32.8% seq.
  7. Balance sheet and cash flow generation remain strong
  8. 4Q11 guidance - for the first three weeks of 4Q11 same store sales are strong at 8.3% at company-owned restaurants and 6.7% at franchise locations as compared to same store sales trends for the first four weeks in the prior year of -0.7% 'at company-owned restaurants and -1.7% at franchise locations.  If the trends persist for the quarter, it would suggest a significant pick up in 2-year trends.  One-time items in the quarter make that unlikely. 
    • The price of chicken wings for the first two months of the fourth quarter is averaging about $1.39 per pound. This compares to last year's average price of $1.49.
    • BWLD boneless wings contract which was due to expire on March of 2012 has been extended through March of 2013 with a very small price increase beginning in April of 2012; the remainder of the commodity basket in 4Q11 is contracted at an increase of about 3.5% YoY.
    • In 4Q11 BWLD expects to leverage labor costs and operating expenses with higher same-store sales trends.
    • The 19 new store openings will be the highest pre-opening cost quarter of the year.
    • Wing prices are moving up.





Howard Penney

Managing Director


Rory Green


Practitioners vs Professors

This note was originally published at 8am on October 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 (  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 1970-1971, “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 $1685-1715, $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

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Exotic Tails

“Patterns replicate through time and manifest on each level because it is a grand unified manner in which all things move.”

-Martin Armstrong


While I am certain that there are plenty Market Practitioners who have adapted to their ecosystem in the last 5 years, uncertainty in Global Macro markets continues to reign supreme.


This is actually a good thing – whoever thinks that they can be certain about a central planner’s ability to suspend economic gravity is probably feeling more uncertain about that by the day.


Chaos Theorists Embrace Uncertainty. It’s what drives our process. No matter what you think about Nassim Taleb, Martin Armstrong, and Ray Dalio, I’m fairly certain that they don’t particularly care. These gentleman have capitalized on proactively preparing for tail risks by simply not allowing themselves to be certain of anything until both Time and Patterns make whatever that is obvious.


Yesterday, it became fairly obvious that 56 exotic animals running down a man’s driveway in Zainesville, Ohio was a risk. There were 18 tigers, 17 lions, and 8 bears. The owner of the fancy pets had shot himself after his wife left him.


In response, a politician in Ohio stated, “this was an accident waiting to happen.”


Ya think?


Exotic Tails of “risk” in Global Macro markets? What we see on the screens today, they are not. Like this whacko with his “pets”, the risks are plainly obvious to anyone who isn’t paid to be willfully blind. They have been since mid-July and early August (see Chart of The Day – when Copper’s TAIL broke).


Up until that intermediate-term 2011 point, these TAIL risks had been becoming more obvious for years. Since October 2007, the SP500 has lost 22% of its value and would need to rally +28.2% “off the lows” to get back to the Perma Bull Breakeven.


Time and Patterns


They take time to manifest and you need to do a tremendous amount of cycle research, across risk management durations, in order to appreciate that at any given time things can blow up.


The US stock market is in the process of either bottoming or blowing up. I could go either way with this really (that’s why I’m hedged; 12 LONGS and 10 SHORTS in the Hedgeye Portfolio). There are no rules against changing your mind. There’s just time and space.


From a timing perspective, the situation in Europe could blow up any day. If it does, no one should be surprised. The monkeys you see swinging from their journalistic rumor trees throughout the trading day are compounding systemic risk for the sake of their short-term careers – and if it suddenly goes bad out there, as Jack Hanna said yesterday in Ohio, “you can’t tranquilize attack monkeys in the dark.”


Short-term vs Long-term


A Keynesian’s answer to accepting responsibility for policy recommendation is that “in the long-run, we are all dead.” Well, unfortunately, for those of us who have successfully managed 5 down US stock markets in the last 12 years (2000, 2001, 2002, 2008, 2011), and seen net US jobs added over the span of this past decade = ZERO, in the short-run, people die too.


What would have happened if these Bengal tigers found a way to survive the night and hit the Streets of Ohio? Ask the monkey who didn’t make it past the end of the driveway…


This is the point. We have all of this Global Macro risk all compartmentalized in cages now. Or at least we think we do. No one can get out. So no one gets hurt.


No one loses their political life. Everyone gets fed their “fair share.”


Until someone opens the cages…


And, then… since no one saw any of this coming – we’ll be on the precipice of another Great Depression again unless we all huddle back into captivity, take our commoner’s wage, and like it.


Yesterday I raised our US Equity position in the Hedgeye Asset Allocation Model to 6% from 3% (we’ve upped our beta by going long Consumer Discretionary, XLY, and selling Utilities, XLU).


I’m bullish on the US Dollar and, in the end, I believe that Americans are smart enough to realize that a Strong Dollar = Strong America.


In the long-term, Time and Patterns agree with me on this. Martin Armstrong says that it’s “the reason life perpetuates through what is called a system of self-referral.” George Soros calls it “reflexivity.” We call it Mr Macro Market.


No matter what you want to call it, it is all based on the most relevant mathematical discovery since relativity. So don’t let the Keynesians call what you see out there today, tomorrow, or the next day, an Exotic Tail.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Oil (bullish TRADE; bearish TREND), German DAX (bullish TRADE; bearish TREND), and the SP500 (bullish TRADE; bearish TREND) are now $1, $80.09-89.11, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Exotic Tails - Chart of the Day


Exotic Tails - Virtual Portfolio


A fairly in-line hold adjusted quarter but the lack of a special dividend is a disappointment.  



We’re not sure we’ve seen a special dividend more telegraphed than this one.  The problem is…there was none.  Not sure if the Board nixed it at the last minute and/or management decided to hoard some cash for the prospect of future development.  Either way, the lack of a special dividend will likely be a disappointment to the fast money in the stock for that very reason.


In any other sector, WYNN’s results would look fantastic.  However, the downside of operating in Macau is that investor expectations are usually at high altitude.  Relative to those expectations, Q3 results were a little lackluster.  Las Vegas was in-line after adjusting for hold but Macau missed our estimate because of the cost side. 


Management was bullish about current trends in Macau which told us essentially what we already knew:  Golden Week was terrific and October is tracking up 34-39% over last year.  While the US$73 million in EBITDA through the first 18 days of October (as disclosed on the call) sounds great, that would project out to $325 million in EBITDA for Q4, essentially in-line with our projection.  One cannot straight line the busiest part of the quarter over the full quarter.



Here are the details of the quarter:



Net revenue came in $4MM higher than our estimate but EBITDA was $11MM light due to higher junket commissions and higher fixed expenses.  Higher than theoretical hold on the VIP side of the business and strong hold on Mass benefited EBITDA by roughly $14MM. 

  • Net VIP table win was $4MM higher than we estimated
    • Direct play was 10% vs. our estimate of 8% but hold was only 1bps lower than we estimated, resulting in gross table win that was $19MM above our estimate.  However, that was offset by a rebate rate that was 3bps higher – 93bps or 31.5% of win.
    • We estimate that all junket commissions & rebates were 42.8% compared to our estimate of 41.2%.  However, we won’t know for sure until Wynn Macau reports.
    • If we used theoretical hold of 2.85%, then gross win would have been $31MM lower and EBITDA would have been $5.4MM lower
  • Mass table win was $1MM lower than we estimated
    • Drop was 10% less than we estimated but the win % was 2% better.  Wynn’s mass hold during the last 3 quarters has been trending at 27.8% - noticeably higher than 23.6% in 2010.  The last 4 quarters have averaged 27.4% hold, so this could be the new norm for their business.  However, if we use a 7 quarter average of 25.3%, revenues would have been $17MM lower and EBITDA would have been about $9MM lower.
  • Slot win was $1MM higher than we estimated
    • Slot handle was disappointing - flat YoY - but a 1% improvement in hold % made up the difference.  It’s probably not a stretch to say that at roughly a $700/win per device, we are seeing some saturation here.
  • Net non-gaming revenue was in-line with our estimate with higher gross revenues in room, retail and other, offset by higher promotional expenses
  • We estimate that fixed expenses, totaling $101MM, were $6MM higher than our estimate


Las Vegas


Revenues and EBITDA came in below our estimate by 6% and 14% respectively due to low hold, higher promotional spending, and lower F&B spend which was somewhat offset by better expense control

  • Net casino revenues were $13MM below our estimate
    • Table drop grew an impressive 15% YoY, much better than our estimate of flat table drop, but hold was only 18.3% vs. our estimate of 24%
      • If we use a normalized hold rate of 23.5% (the past 7 quarter average), revenues would have been $32MM better and EBITDA would have been about $16MM better.
  • Slot win was $1MM better than we estimated
    • Slot handle on the other hand wasn’t so impressive – decreasing 2.4% YoY vs. our estimate of 5.0% growth.  A better win % more than made up the difference though. Wynn’s win % has been increasing over the last few years largely due to the removal of the video poker machines which had payout ratios of about 99% and what looks like some recent yield management.
  • Total gaming discounts and promotions totaled 17.4% of gross casino win- higher than the 15.9% discount rate from 2010 and the 15.9% rate last quarter

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