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Keith bought BYD in the Hedgeye Virtual Portfolio at $9.14 According to his model, the TRADE range is between $8.91 and $9.56, and the TREND support level for BYD is at $7.28.



BYD is down over 4% today, pretty much in line with what the stock was up on Friday.  BYD missed our EBITDA number slightly – $114.3 vs $115.0 million – but we were high on the Street.  Q4 EBITDA did exceed consensus by $1.5 million, so a very solid quarter.  We continue to be impressed by the performance of the Las Vegas locals properties which generated a combined 8% YoY increase in EBITDA, and every property was up.  Moreover, we think management’s commentary will be positive on the noon call as it relates to this market and the outlook for sustained growth (finally). 








  • This investigation began in July 2010, when Mr. Okada approached Mr. Wynn about building a casino in the Philippines.  The request triggered an investigation by the Compliance Committee.
  • In February 2011, one group that was hired to do a follow-up assessment about doing business in the Philippines uncovered some questionable associations of Mr. Okada in the Philippines. 
  • The license granted to Okada in the Philippines in May 2010, was granted by the official whose son benefited from some comps that Okada's firm had granted him 
  • The Board advised Mr. Wynn against doing business in the Philippines
  • In August 2011, they decided that they needed to follow up under the Foreign Corrupt practices Act and all members of the Board attended that meeting aside from Mr. Okada who refused to received FCPA training 
  • There were also issues surrounding the individual that sold the Philippines land to Mr. Okada - who was convicted of tax evasion on the proceeds from the sale for understating the proceeds.
  • September 2011: Compliance Committee met again and discussed the indictment of certain PAGCOR officials, the sale of the land to Mr. Okada, and other related matters.  Mr. Okada had a negative reaction about the findings of the Board's investigation.  Mr. Okada said that it was customary under Asian practices to give gifts to people who you do business with
  • In September, Wynn's attorneys met with Mr. Okada and his attorney to raise the Board's concern about him doing business in the Philippines and it's potential adverse impact on Wynn Resorts.  Mr. Okada did not recognize the potential for conflict and refused to cease his operations in the Philippines or to resign from the Board. 
  • The Wynn Board subsequentially hired Judge Freeh.  Okada refused to be interviewed by the judge by the deadline of February 2, but agreed to an interview on Feb 15th for 7 hours. Freeh's report was submitted to the Board on February 18th. The report found issues with Okada's activities in Philippines and that they posed a violation of the Foreign Corrupt Practices Act and that he sees nothing wrong with giving gifts to government officials with whom he does business with. 
  • Universal paid part of the expenses of a Philippines official's trip to Beijing during the Olympics
  • As a result of all of the findings of the Board's investigation, they found Mr. Okada "unsuitable"
  • Wynn's Articles of Incorporation state that pursuit to a finding of unsuitability they must take steps to redeem that person's interest in the Company and failure to do so will result in risk to Wynn
  • The Company engaged Moelis & Company to determine the fair value of the share, and Moelis determined that a 30% discount was appropriate given the restrictions on the shares.  The Articles state that redemption may be made in cash or promissory note bearing interest at 2%. 
  • The redemption has already occurred
  • Okada's actions against Wynn's gift to the University of Macau was not about the amount but actually suggested that the pledge be made over 5 and not 10 years.  Mr. Okada was present at the gifting ceremony. The gift to the University was fully vetted by the Board. 


  • Law Firms envolved: Wachtell Lipton was advising them; Bob Shapiro; Gibson Dunn
  • Minutes of the company meetings are provided to regulators at the time they are prepared.  The gaming regulators in Nevada were aware of the ongoing investigation
  • Civil litigation was initiated by the Company concerning Mr. Okada's suitability to sit on Wynn's Board.  A copy of the Freeh report was filed in that case and is publicly available.
  • The share redemption occurred on Saturday - the actions available to Mr. Okada cannot be subject to an injunction because it has already occurred.  He can contest the valuation though.
  • There is no other action required from Wynn to complete the redemption
  • The Nevada gaming commission has the ability to review everything that has occurred and they are going to conduct their own investigation
  • The transfer agent was notified that the redemption has occurred and they are obligated to comply
  • There are 37 separate incidences of potential violations in the Freeh report



  • WYNN's "Compliance Committee has concluded a year-long investigation after receiving an independent report detailing numerous apparent violations of the U.S. Foreign Corrupt Practices Act (FCPA) by Aruze USA, Inc., its parent company Universal Entertainment Corporation and its principal shareholder, Kazuo Okada."
  • "Freeh’s investigators uncovered and documented more than three dozen instances over a three-year period in which Mr. Okada and his associates engaged in improper activities for their own benefit in apparent violation of U.S. anti-corruption laws and gross disregard for the Company’s Code of Conduct. These troubling discoveries include cash payments and gifts totaling approximately $110,000 to foreign gaming regulators."
  • “Mr. Okada and his associates and companies appear to have engaged in a longstanding practice of making payments and gifts to his two chief gaming regulators at the Philippines Amusement and Gaming Corporation (PAGCOR), who directly oversee and regulated Mr. Okada’s Provisional Licensing Agreement to operate in that country,” and have “consciously taken active measures to conceal both the nature and amount of these payments.”
  • "Based on the Freeh Report, presented to the Wynn Resorts Board of Directors on February 18, 2012, the Board determined that Aruze USA, Inc., Universal Entertainment Corporation and Mr. Okada are “unsuitable” under the provisions of the Company’s Articles of Incorporation." and requested Mr. Okada's resignation from the Board. 
  • "Pursuant to the finding of “unsuitability,” the Board has redeemed Aruze USA, Inc.’s 24 million Wynn Resorts’ shares. The terms of redemption are outlined in Wynn Resorts’ Articles of Incorporation, which have been in place since the Company’s inception... The Company engaged an independent financial advisor to assist in the fair value calculation and concluded that a [30%] discount to the current trading price was appropriate because of restrictions on most of the shares which are subject to the terms of an existing stockholder agreement. Pursuant to the Articles, the Company has issued a 10-year $1.9 billion promissory note in redemption of the shares. The note matures on February 18, 2022 and bears interest at the rate of 2% per annum."
  • "Wynn Resorts today filed a lawsuit against Mr. Okada, Aruze USA, Inc. and Universal Entertainment Corporation inNevada District Court, Clark County for breach of fiduciary duty and related offenses."






Comments from CEO Keith McCullough


Top 3 Most Read on Bloomberg = Greece. Meanwhile the rest of the world’s Growth Slowing (sequentially) doesn’t cease to exist:

  1. FRANCE – now that we have a +18% German DAX rally (YTD) out of the way (Greece was +23% at its YTD peak), we can focus on separating the weak parts of European growth from the strong (Germany). France’s CAC40 fails to breakout above its long-term TAIL of 3565 resistance again. Growth Slowing in France is a major problem – so is Hollande’s continued momentum in the polls vs Sarkozy.
  2. OIL – never in the history of Global Consumption has $100 handle per barrel (pick your flavor) not slowed Consumption. On the margin is where discretionary consumption matters and if we push toward $5 at the pump, I think you’ll see this time is not different. After being long Consumer Discretionary (XLY) for most of December-January (on Strong Dollar = Strong Consumption), I shorted it on Friday.
  3. 10yr YIELD – this is the 2nd time this year that we’ve seen an intraday test of my 2.03% intermediate-term TREND line for 10yr Treasury yields. A sustained close > than this line could tip flows from bonds to stocks. But I need to see this confirm for at least 3 weeks in a row, not 6 hours.

China wouldn’t have cut the reserve requirements if Growth Slowing wasn’t a bigger problem than expected right here and now.







THE HBM: SBUX, MCD, CBRL - subsectors





SBUX: Starbucks CEO Howard Schultz addressed the country’s unemployment rate on CNN’s “State of the Union”.  He believes that the unemployment rate is “still disastrous”. 


MCD: McDonald’s features in an interesting article on adage.com, published on Sunday, that cites “people close to the company” as saying that “its internal tracking system finds that McDonald’s consistently ranks near the bottom in quality perception when compared to rivals”.  The company is working to close the gap, these people said, by addressing issues related to perceptions about its food quality, sourcing and nutritional value; sustainability practices, including suppliers’ treatment of animals; service; and condition of stores. 





THI and JACK: gained 1.2% on accelerating volume.





CBRL: Cracker Barrel reported Adjusted 2QFY12 EPS of $1.20 versus expectations of $1.14.  Restaurant comps improved sequentially throughout the quarter, coming in at +3.5% versus consensus of +1.1%.  Average check was up +2.4% and traffic was up 1.1%.  Cost of goods sold were 35% of sales versus 35.6% consensus.  The company raised guidance; FY12 EPS is expected to be between $4.20-4.35 versus consensus $4.29.  Guidance reflects increases in comparable store restaurant and retail sales in a range of +1-2%.





PFCB: One of our top longs, this stock got a couple of upgrades on Friday. Kona COO taking up the COO job at P.F. Chang’s China Bistro also positive.


BJRI: Down -3.2% on accelerating volume


KONA: Larry Ryback leaving the firm is the latest in a series of bad news for Kona Grill.





Howard Penney

Managing Director


Rory Green



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We doubt it.  Hard to believe Mr. Universal will settle for even close to a 30% haircut and a 2% decade long promissory note.



The sell side will portray this as a leveraged recap of Wynn Resorts.  Under the current terms, we calculate 16% earning accretion in 2012 and 20% in 2013.  On a free cash flow basis, the accretion looks even better – almost 20% for this year.  Not bad but also not realistic.  Okada doesn’t strike us as the kind of dude who is going to bend over and take a 30% haircut to the value of his shares along with payment in the form of a 2% yielding 10 year promissory note.


The move by the WYNN Board of Directors appears unprecedented.  Ultimately, the relationship is unsustainable and we suspect the two warriors will reach some sort of a settlement - eventually.  However, we think WYNN will have to pony up more cash and significantly narrow the discount.  Under any believable scenario, the transaction will still be accretive to EPS and FCF per share, just not at the levels discussed above or by the Street.


The big tail risk here is that Okada retaliates.  He has a history of being litigious and an airing of dirty laundry won’t be a positive for the Wynn brand both with customers and regulators (see http://www.bloomberg.com/news/2012-02-21/okada-takes-court-experience-to-wynn-fight.html).  Come to think of it, it may not be a positive for any US gaming company operating overseas.


WYNN will hold a 9am conference call this morning to discuss.


The Macau Metro Monitor, February 21, 2012




Wynn Macau director Kazuo Okada may face bribery charges after a probe by Wynn Resorts uncovered alleged improper payments to Philippine gaming officials.  WYNN has asked Okada to quit the board and filed a lawsuit in Nevada State against Okada and two of his companies for breach of fiduciary duty and related offenses.  WYNN said it found “more than three dozen instances over a three-year period in which Mr. Okada and his associates engaged in improper activities...in apparent violation of U.S. anti-corruption laws”.  Sources say the probe was carried out on the ground by a local company linked to the gaming industry and that the report’s conclusions have been sent to the US judicial bodies.


Okada told the investigators he was not aware of the payments, which he claimed were made by his employees.  One employee was fired and another resigned over the incident, he added.  The Japanese businessman also said he had launched an investigation and would ask the Filipino officials to return the payments and gifts.  One of his companies, Universal Entertainment, a Japanese pachinko machine maker, said it would “take all legal actions necessary to protect its investment in Wynn."


According to the local Commercial Code, Wynn Macau can only remove a director through a shareholder vote.  However, a WYNN spokesperson said, “the board of directors of Wynn Macau can vote to remove a director for cause”.

The Gaming Inspection and Coordination Bureau (DICJ) said it was informed of the incident by Wynn Macau even before Wynn Resorts made a public statement.  “We have already asked for more information and our legal advisors will look into these allegations and whether there was any breach of Macau laws, gaming licenses or concession contracts,” DICJ director Manuel Joaquim das Neves said.  Wynn Macau has assured the gaming regulator that the decision and the ongoing legal dispute with Okada “will in no way affect the normal operation of the company,” he added.


Wynn Resorts said it redeemed the 24 million shares held by Aruze USA, a slot-machine company controlled by Okada’s Universal Entertainment, at 'fair value' and issued a 10-year USD 1.9 billion promissory note for the stock.



Sands Cotai Central which will open in April, has begun accepting accommodation reservations.  Guests can begin booking rooms and suites at Conrad and Holiday Inn for stays from May 2.


The first Phase of the opening of the Cotai development will feature 600 rooms and suites from Conrad, and over 1,200 guestrooms and suites from Holiday Inn.  When Sands Cotai Central is fully completed in 2013, Sheraton will offer an additional 4,000 guestrooms and suites, bringing the total to nearly 5,800 rooms and suites.



January 2012 passenger traffic increased 12.1% YoY.





January CPI increased 6.8% YoY and 0.93% MoM.  



The construction works for the first Light Rapid Transit route in downtown Taipa will start tomorrow but the Transportation Infrastructure Office (GIT) has pledged to minimize the impact on traffic.  The two-kilometer project, which will include five stations – Ocean Gardens, Macau Jockey Club, Macau Stadium and one between the old Taipa village and the Galaxy Macau resort – will cost MOP 489 million.  The works should be ready around May 2015.



Sheraton Macao Hotel, which plans to open in September 2012, has announced a large-scale recruitment drive for the local market from March 2-4.  The 3,863-room Sheraton Macao Hotel will be both the largest hotel in Macau and in the over 1,000-strong portfolio of hotels and resorts owned by Sheraton.  The hotel will be set over two towers with access to over 20,000 square meters of flexible meeting space and is a good place for large-scale association, meetings and incentive groups and events of all sizes.  Recreational facilities include a Spa, three pools surrounded by 12,000 square meters of deck space, as well as fitness and kid’s entertainment programmes.



Prices in 47 of the cities fell, while home values in the remaining 23 were unchanged from December, the National Statistics Bureau said.  New home prices in the nation’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou declined for a fourth month.

Corridors of Power

This note was originally published at 8am on February 07, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Inspired by a common creed, the young Keynesians sought each other out in the corridors of power.”

-Nicholas Wapshott


Picture that. I just love the drama associated with that quote by Nicholas Wapshott in Chapter 11 of “Keynes Hayek” titled Keynes Takes America. He was referencing meetings these guys would have in Washington at the National Planning Association in the early 1930s.


A National Planning Association!


Back to the Global Macro Grind


Evidently we are now centrally planning a tax on not only American Savers, but Global Consumers too. Nice.


The price of Brent Oil is up almost +6% ($115.95/barrel this morning) since The Bernank’s decision to pander to the Corridors of Power and adopt his conflicted and compromised 0% rate or return for American Savers through 2014.


This is not new, but since President Obama took office in January of 2009:

  1. The US Dollar Index = down -8.3%
  2. The Price of Oil = up +165.8%

Now before you get all heated for my using the name Obama (my wife and I voted for him – team vote), long-time readers of my morning rants will recall that I was equally critical of President Bush’s Keynesian Policies to Inflate. Democrat or Republican in this country, if you’ve been economically “advised” in the last decade within the Corridors of Power, you’ve been Keynesed.


So how is that working out for you?

  1. The net jobs added during the Bush/Obama decade in America = 0
  2. The Price of Oil = +460% in the last decade (since February 2002)
  3. Your Savings Account has been given The Gold Finger (Gold up for 11 consecutive years)

But say nothing of these common Keynesian Creeds because political life is easier that way. Or is it? And for whom?


Broadening our horizons beyond the World Bank and IMF’s headquarters (right next to the Fed in Washington, DC), what’s happening in the rest of the world right now (particularly in the East) is that, ironically enough, 80 years later, young economists are gathering at their own meetings – Hayekians, Thatcherites, and Chaos Theorists – all of them. They don’t believe in National Planning Boards.


Look at what’s going on outside of the Corridors of Washington Power this morning:

  1. The Prime Minister of Singapore is warning of a “rough landing” in China if food/energy inflation re-accelerates
  2. The head of the Reserve Bank of Australia, Glenn Stevens, refused to cut interest rates on his citizenry’s savings accounts
  3. Greece

What about Greece? It’s literally the first time in 2012 that all 3 of the Most Read headlines on the Bloomberg machine are about Greece this morning. Now that the Greek stock market is down -54% since February of last year when your local Keynesian strategist was telling you Greece was a “one-off” and Global Growth was “going to be fine”, I guess it matters…


Or does it?


Bloomberg news also reports this morning that the “Irish Urge Children to Leave Amid Job Losses.” Great.


The Global Zeitgeist on these macro matters is fairly straight forward. No one trusts that any one of these aging Keynesians will get it right in the end. That’s one of the many reasons why the US Labor Participation Rate in last week’s glorified employment report hit a 30-year low. People are giving up.


Keynes nailed it – in the long-run, all of the politicians will be dead. That said, in the short-run the rest of us have to live.


Larry Kudlow asked me last night where I see the immediate-term economic pressure (growth expectations falling as inflation expectations are rising). With Energy stocks (XLE – we’re long inflation expectations) up +1.2% on the day and the SP500 flat, it was fairly obvious yesterday. That was good for my P&L – not good for the country.


Long-term US Treasury yields have been signaling Growth Slowing since Ben Bernanke made his move on January 25th. Just when free markets were getting ready to bust a move above my key intermediate-term TREND line of 2.03% resistance on the 10-year, boom – we got Bernanked.


Being Keynesed or Bernanked may be good for short-term stock sector and commodity market inflations, but they’re not good for the long-term economic health of this or any other consumption led economy.


My immediate-term support and resistance ranged for Gold, Oil (Brent), EUR/USD, Energy (XLE), 10-year UST Yield, and the SP500 are now $1704-1762, $112.56-115.93, $1.30-1.32, $71.93-73.76, 1.80-1.96%, and 1325-1348, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Corridors of Power - Chart of the Day


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