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“There appears to be little or no equity value in Caesars' core business given the ugly financials. Yet the IPO prospectus shows Caesars carved out its online business, including the World Series of Poker, into a separate unit unencumbered by debt. This means Caesars equity holders should get - all the online profits; hence the investor focus.”

  • Andrew Barry, Barron’s

In the Barron’s article “Is Caesar’s a Sucker’s Bet”, journalist Andrew Barry suggested that the online carve-out explains the post-IPO stock pop of CZR.  Before suspending disbelief, investors should consider several important points.

  • Barring a massive recovery in its core business, CZR is likely to remain cash flow negative for the foreseeable future.  There is a high likelihood that this company will need to restructure (maybe another bankruptcy) its balance sheet at some point down the road. 
  • Federal legislation now looks a lot less likely than a month ago since the “Barton Bill” did not get tacked on to payroll tax extension as many hoped.  There is still hope that HR 2366 will get tacked onto a piece of must pass legislation this year (e.g. Highway Bill), although the odds look slim.  An online gaming market developed through the State route will take longer to develop and be smaller in size.
  • Barring a spin-off of Caesar’s Interactive, any profits (which are minimal at the current time) coming from this business will go into the general pool of cash used to pay CZR’s massive interest obligations of $1.6BN on debt of $23 billion.
  • A spin-off of Caesar’s Interactive poses material tax consequences for both Caesar’s Entertainment and its shareholders unless they can effect a tax-free spin under Section 355
  • While it is true that Caesar’s Interactive has no debt, that doesn’t mean that it is truly “unencumbered.”  CZR’s secured lenders at the operating company and CMBS entity have upstream guarantees secured by stock in Caesar’s Entertainment Corporation (CEC) and thereby an indirect claim to anything that CEC owns.  If a spin-off occurs, and debt holders don’t receive consideration for their stake, they have a strong case of fraudulent conveyance should CZRs eventually file.  Even if no filing occurs, there are likely to be lawsuits brought by debt holders to either prevent a spin-off or to get a piece of the proceeds.

Since the hope of Federal legislation has begun to fade, the stock has plummeted 40% off its highs.  Still at $10.54 per share CZR is valued at 12x our 2013 EBITDA estimate- a far cry from being reasonably priced.

  • A slight premium to Wynn which has much higher quality assets, an option on Cotai, more development opportunities in Asia, and happens to return a large amount of cash to shareholders
  • A slight premium to LVS which has Sands Cotai Central opening in less than 2 months, much higher asset quality, and more attractive growth opportunities
  • A 2x premium to MGM, which also has better quality Strip assets, a casino in Macau and an option on Cotai, and an option on US online gaming through its Bwin.Party agreement


Full month GGR should come in between HK$22.5-23.0 billion for February, up 17-19% YoY. 



Average Daily Table Revenues at HK$775 million were similar to the rest of the month at HK$775 million and above even January's level.  Macau is definitely coming in hotter than expected.




The weekly market share moves were interesting, particularly Wynn.  Wynn lost 140bps in one week.  Usually, moves like that are hold related but we wonder if another factor is at play.  Our sources tell us that Wynn could be turning into persona non grata in Asia with this Okada spat.  In Macau, people are questioning whether he violated the Privacy Act which, per Portuguese law, prohibits the disclosure of customer information.  It will be interesting to get more market share data points to see if this issue impacts business.  Obviously, a one week market share drop – as precipitous as it was – is not enough to indicate a trend.


LVS and MPEL were the big market share gainers.  Clearly, with Macau’s resurgence, if sustainable, MPEL would be the prime beneficiary.  Galaxy continues to disappoint on the market share side.  Its trailing 3 month share of 19.6% was hold related so 17-18% may be more the norm and that isn’t good enough.








Comments from CEO Keith McCullough


Greece is back in the Top 3 Most Read next to Buffett pushing his politics and positions. Nice:

  1. GREECE – a not so funny thing happened on the way to the risk mgt forum – w/ Greek stocks down another -1.6% this morning (leading losers globally), they’ve gone from up +23% to +8% YTD in less than 2 weeks. Big Government Intervention perpetuates volatility. Nice.
  2. OIL – 2 down days in a row is as bullish as bullish does for Global Equity markets. Asia acted as well as it has in FEB last night and US Futures like oil down because they should – it’s good for the 71% (Consumption/GDP). The problem, of course, is that Brent and WTIC only have 2-3% downside in the immediate-term and should resume their inflations thereafter.
  3. BONDS – both the UST 10yr and the Yield Spread are telling you all you need to know about US Growth Slowing sequentially here in FEB. The Durable Goods number is a JAN print and doesn’t really matter in my model – the PMI and ISM prints for FEB (wed and thur) do. 10s failed at 2.03% TREND resist and then snapped 1.97% TRADE support. No real support now to 1.89% w/ 10s/2s Spread -4bps already for the wk-to-date.

Higher-Highs are exciting in the SP500 in the meantime (1 range). I’m trading risk aggressively and enjoying it quite thoroughly.







THE HBM: DPZ, GMCR, MCD, DRI - subsector





DPZ: Domino’s Pizza reported 4Q11 EPS of $0.52 versus consensus $0.49.  The company-owned domestic store base saw comps increase +8.7% versus consensus +7.5%.  The company raised its “long term guidance” for international comps, net units, global retail sales and capex.  Consistent with the message management sent at ICR in January, the company announced a recapitalization today.


THE HBM: DPZ, GMCR, MCD, DRI - dpz pod1



GMCR: Green Mountain coffee holder Lavazza has reduced its stake in the company to 4.99%.  In a 13-D filing, Lavazza stated that it does not currently intend to sell any additional shares.


MCD: McDonald’s is considering selling dim sum bonds in Hong Kong as one option for raising funds to expand in China.





DPZ: Domino’s traded up yesterday in anticipation of today’s print.


JACK:  Jack in the Box is hosting its Investor Day today – the first one since 2008.




DRI: Darden was maintained “Buy” at Sterne Agee.  The price target is $52.  Sterne highlighted management’s confidence in the Olive Garden turnaround.


DRI: Darden was maintained “Neutral” at DA Davidson.  The firm noted uncertainty persisting for the company’s Olive Garden business.







Howard Penney

Managing Director


Rory Green



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


The Macau Metro Monitor, February 28, 2012




Gaming operator Wynn Macau Ltd. may have breached the local privacy law by publicly disclosing personal information of hotel guests as part of the Freeh report on removed director Kazuo Okada.  Ben Lee, the former vice president of casino marketing at Venetian Macau, says the move may scare off some VIP promoters.


The disclosure might have breached Macau’s personal data protection law, which came into effect in 2006. The law states that personal data can only be “collected for specific, explicit and legitimate purposes (…) and it cannot later be used in a manner incompatible with those purposes”.  The Macau law also restricts the transfer of personal data outside of the territory, stressing that it can only be done if the Office for Personal Data Protection (GPDP) decides that “the legal system [of that country or territory] to where it [data] is transferred ensures an adequate level of protection”.  If a company is found guilty of breaching the privacy law then it could be slapped with a fine between MOP 10,000 and 100,000.  Moreover the person found responsible could face a one-year jail term or a 120-day fine.



"Giving comps to hotel rooms is endemic throughout the entire industry," Adelson said. "I think by getting something in the FCPA (the U.S. Foreign Corrupt Practices Act) for a hotel room doesn't mean you're going to buy that person's allegiance and buy them to do what you want for billions of dollars worth of anything. But that's the way the law is,"


Adelson said he does not think that he will gain from Okada and Wynn's feud in Japan.  "Number one, I don't believe Okada's position in Japan gave Wynn an advantage because from what I've heard from government people they want to separate casinos from pachinko - either the manufacturers or the operations - so they want to keep the two separate. I've been told they (Japanese government officials) won't consider anyone for a casino that has an interest in either manufacturing or operating pachinko."



The proposed new casino at Barangaroo would be part of a two-pronged approach by tycoon James Packer to market Sydney as a major destination to well-heeled Asian tourists.  It is understood the casino component of Packer's proposed $1 billion hotel and entertainment complex would be modeled on the exclusive Mahogany Room at Melbourne's Crown Casino.


Packer is looking to build the new casino/hotel through his Crown Group if he can  win control of Echo Entertainment - the operator of The Star in Pyrmont - after raising his stake from 4.9% to 10%.  Sources said last night the new casino would have far less tables than The Star, but would cater largely to a VIP clientele.


The Barangaroo complex would have no poker machines, but given that Echo's licence has no restriction on the number of gaming tables, it is believed the proposed hotel/casino would concentrate on table games such as baccarat.

Perfect Market

This note was originally published at 8am on February 14, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Hayek reminded his audience, the perfect market does not exist.”

-Nicholas Wapshott


Another day, another major easing by another major central bank. Japan’s decision to inject another 10 Trillion yens of liquidity into the market reflects, well, that they think they’re going to have a liquidity problem!


Ostensibly, Keynesians have been cheering on this type of Japanese behavior since 1997. That’s when Bernanke’s bud, Paul Krugman, told Japan to “Print Lots of Money.” Fifteen years later, Japan will have to roll over 242 Trillion Yens in debt (principal + interest) or 24.7% of its current marketable sovereign debt load in 2012.


Bubble in Keynesian Economics. Perfect.


Back to the Global Macro Grind


Keynesians would have you believe that they can centrally plan markets so that we never have hard landings. Hayekians will take the other side of that. Market’s rarely, if ever, price tail risk perfectly. In real-life, Keynesian expectations perpetuate tail risks.


As Hayek reminded us, “economic decisions in real life are made by individuals based on partial knowledge of current conditions coupled with their best guess of what may happen. Each individual comes to a different judgment about what those conditions might be. Some get the decision right, some wrong.” (Keynes Hayek, page 180)


Dynamic, non-linear, and interconnected – words that you’ll never hear from a US central planner – but these are the Global Macro Risk Management days of our lives. There is no such thing as the Perfect Market, no less the perfect consensus pricing of globally-interconnected risk. Anyone who tells you otherwise is in the business of selling you a fairy tale about certainty.


So what happened on the “news” this morning?

  1. No one cared about the Moodys “news” because it’s a year old
  2. Japanese Yen snapped its intermediate-term TREND line of 0.013 (YEN/USD)
  3. Copper snapped an immediate-term TRADE line of $3.88/lb support

Notice Greece isn’t the new Global Macro news this morning. Neither is Apple. If you didn’t know that the legacy news cycle operates on a lag relative to Hayek’s “moving picture”, now you know…


Dow 15,000?


Other than tacking another crumpled Barron’s cover to the cork-board behind my desk, I have no idea what to tell you about The Old Wall and its propensity to delve into these deeply intellectual debates about big round numbers.


What I can tell you is what my baseline 3 factor model (Price, Volume, Volatility) is saying about the SP500 at 1351:

  1. Price: all closes below 1363 are lower long-term highs versus the flailing one people chased in April of 2011
  2. Volume: just flat-out nasty volume signals (ie no volume) are being registered, daily now, at these lower highs
  3. Volatility: the VIX is making a series of higher long-term lows and building immediate-term TRADE support at 18.31

That’s an immediate-term view of the SP500. I have no idea where the SP500 or the Dow is going to close in 3 years, never mind when it’s going to pin the tail on the 15,000 donkeys. Each and every day, we reserve the free-market right to change our minds about probabilities, scenarios, and risks. As the Inflation and Growth data changes, we do.


What’s up next for the data?

  1. Inflation Expectations continue to rise, sequentially, so look for that in the US import price report today – then the PPI and CPI reports on Thursday and Friday.
  2. Growth Expectations continue to slow, sequentially, so look for that to be reconciled by the Global Macro data, daily.

Not everyone has a process to absorb Global Macro economic data so, to a degree, it shouldn’t be a surprise that people gravitate toward the “news” that’s being pumped into them. Our timing on the rate of change in both Growth and Inflation can often be early. Perfectly timing markets with 100% accuracy also implies some orange jump suit risk that we’re not willing to take on.


In addition to 10 Trillion reasons why the Japanese are implicitly acknowledging the severe Deficit/GDP issues associated with running a -2.3% year-over-year GDP number in Q4, here are some other Global Growth Slowing signals of the last 48 hours:

  1. Chinese Equities failed at intermediate-term TREND resistance (2372 Shanghai Comp) again, closing down -0.3% overnight
  2. French Equities failed at long-term TAIL resistance (3565 CAC) again, and are down for the 4thtrading day of the last 7
  3. US 10-year Treasury Yields failed at intermediate-term TREND resistance (2.03%), again this morning (1.97% last)

And, don’t worry, I get it – I’m highlighting the negative signals – but I also get that these are very big ones. Without Japan, China, Europe, and the US confirming whatever Apple and Greece did in the last 24 hours, I get paid to ask the question – again – how perfect has consensus been in the last 4 years in missing the most perfectly interconnected market signals?


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1712-1760, $115.79-120.03, $1.30-1.33, and 1342-1362, respectively.


Best of luck out there today and Happy Valentine’s day to my beautiful wife Laura,



Keith R. McCullough
Chief Executive Officer


Perfect Market - Chart of the Day


Perfect Market - Virtual Portfolio


TODAY’S S&P 500 SET-UP – February 28, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.70% downside to 1358 and 0.40% upside to 1373. 












  • ADVANCE/DECLINE LINE: -26 (-298) 
  • VOLUME: NYSE 732.41 (14.27%)
  • VIX:  18.19 5.08% YTD PERFORMANCE: -22.26%
  • SPX PUT/CALL RATIO: 2.36 from 2.26 (4.43%)


BONDS – both the UST 10yr and the Yield Spread are telling you all you need to know about US Growth Slowing sequentially here in FEB. The Durable Goods number is a JAN print and doesn’t really matter in our model – the PMI and ISM prints for FEB (wed and thur) do. 10s failed at 2.03% TREND resistance and then snapped 1.97% TRADE support. No real support now to 1.89% with 10s/2s Spread -4bps already for the wk-to-date. 

  • TED SPREAD: 38.74
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 1.93 from 1.93
  • YIELD CURVE: 1.64 from 1.64 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Durable Goods, Jan., est. -1.0 (prior 3.0%)
  • 9:00am: S&P/Case-Shiller 20 City, Dec. est. -0.35% (prior - 0.70%)
  • 10:00am: Consumer Confidence, Feb., est. 63.0 (prior 61.1)
  • 10:00am: Richmond Fed, Feb., est. 14 (prior 12)
  • 10am: Fed’s Duke testifies on housing to Senate Banking Committee
  • 11:30am: U.S. selling $40b 4-week bills, $20b 49-day bills
  • 7:15pm: Fed’s Pianalto speaks on economy in Westfield Center, Ohio 


  • President Obama speaks at United Auto Workers legislative conference, 11:30am
  • FDIC holds briefing on quarterly bank industry earnings, 10am
  • House, Senate in session:
    • House Appropriations Committee hears from Attorney General Eric Holder on his agency’s budget, 9am
    • Senate Budget Committee hears from Defense Secretary Leon Panetta and Joint Chiefs Chairman Martin Dempsey on the Pentagon budget proposal, 9:30am
    • Senate Energy and National Resources Committee holds hearing on Interior Department budget request, 10am
    • Senate Agriculture Committee holds hearing to develop a 2012 farm bill, 10am
    • House Energy and Commerce Committee hears from EPA Administrator Lisa Jackson on her agency’s budget request, 10am
    • Senate Banking and Housing Committee hears from Housing Secretary Shaun Donovan and Fed Gov. Elizabeth Duke on the state of the housing market, 10am
    • Senate Appropriations Committee hears from Secretary of State Hillary Clinton on the State Department’s budget request, 10am
    • House Appropriations Committee hears from TSA Administrator John Pistole on his agency’s budget. 11am
    • House Ways and Means Committee hears from Health and Human Services Secretary Kathleen Sebelius on her agency’s budget request, 1pm
    • House Appropriations Committee hears from Energy Secretary Steven Chu on his agency’s budget request,2pm   


  • Rick Santorum, Mitt Romney face off in Michigan, Arizona presidential primaries
  • Orders for U.S. durable goods may have dropped 1% in January on slower aircraft demand, economists est.
  • Supreme Court hears oral arguments in case involving Royal Dutch Shell over whether corporations are immune from tort liability for violations of intl law, 10am
  • JPMorgan holds annual investor day
  • Greek parliament votes on implementation law for austerity measures
  • TomTom falls as much as 19% as 2012 rev. forecast trails est., watch Garmin
  • News Corp., Warner Bros. said to be working with Sandisk, Western Digital to create storage devices for film, TV 


    • Fresh Del Monte Produce (FDP) 6 a.m., $0.09
    • Tech Data (TECD) 6 a.m., $1.66
    • Fortress Investment Group (FIG) 6:30 a.m., $0.10
    • Magellan Health Services (MGLN) 6:30 a.m., $0.79
    • Sanderson Farms (SAFM) 6:30 a.m., $0.18
    • Vitamin Shoppe (VSI) 6:30 a.m., $0.33
    • NRG Energy (NRG) 6:45 a.m., $(0.17)
    • Canadian Apartment Properties REIT (CARu CN) 6:51 a.m., $0.32
    • AutoZone (AZO) 7 a.m., $4.04
    • HollyFrontier (HFC) 7 a.m., $1.20
    • Xylem (XYL) 7 a.m., $0.46
    • Office Depot (ODP) 7 a.m., $0.00
    • Bank of Montreal (BMO CN) 7:12 a.m., $1.36
    • Tenet Healthcare (THC) 7:30 a.m., $0.14
    • Viropharma (VPHM) 7:30 a.m., $0.55
    • Ariad Pharmaceuticals (ARIA) 7:35 a.m., $(0.18)
    • Mentor Graphics (MENT) 7:50 a.m., $0.50
    • Rowan Cos (RDC) 8:10 a.m., $0.30
    • Cablevision (CVC) 8:15 a.m., $0.23
    • Ecolab (ECL) 8:25 a.m., $0.70
    • FirstEnergy (FE) 8:30 a.m., $0.75
    • Sempra Energy (SRE) 9 a.m., $1.06
    • DreamWorks Animation SKG (DWA) 4 p.m., $0.31
    • MarkWest Energy Partners (MWE) 4 p.m., $0.49
    • Collective Brands (PSS) 4 p.m., $(0.81)
    • First Solar (FSLR) 4:04 p.m., $1.57
    • Universal Display (PANL) 4:05 p.m., $0.06
    • Kodiak Oil & Gas (KOG) 4:10 p.m., $0.09
    • Chesapeake Midstream Partners (CHKM) 4:15 p.m., $0.43 


OIL – 2 down days in a row is as bullish as bullish does for Global Equity markets. Asia acted as well as it has in FEB last night and US Futures like oil down because they should – it’s good for the 71% (Consumption/GDP). The problem, of course, is that Brent and WTIC only have 2-3% downside in the immediate-term and should resume their inflations thereafter.

  • Soy Stocks Fall Most Since 1996 Amid Brazil Drought: Commodities
  • Oil Declines a Second Day on Concern Price Gains Sapping Demand
  • Copper Rises to Two-Week High on Signs of Stronger Confidence
  • Sugar May Tumble Below 20 Cents on Surplus, F.O. Licht Says
  • Soybeans Climb to Five-Month High as Rains Too Late for Brazil
  • Gold Advances in London as Weaker Dollar Spurs Investor Demand
  • Sugar Falls as Brazil’s Exports Are More Profitable; Cocoa Rises
  • Iron Ore Cuts Monthly Loss on Speculation China Demand to Climb
  • World’s Biggest Tea Auction Halted Over Kenya Tax Dispute
  • Oil Supplies Climb in Survey on Canadian Imports: Energy Markets
  • BP Investors See Spill Deal Narrowing $44 Billion Gap: Energy
  • ONGC, GAIL Plan $2 Billion Bid for Cove, Times of India Says
  • Muddy Waters Losing Support in Stock Market on Latest Calls
  • Tankers Falling 42% as Japan Oil Use Drops
  • China’s Iron Ore Imports May Drop 14% as Domestic Output Gains
  • Newmont Says It’s Too Early to Say Whether Conga Will Proceed
  • Batista’s OSX Debut Offering Buoyed by Oil Output: Brazil Credit 









GREECE – a not so funny thing happened on the way to the risk management forum – with Greek stocks down another -1.6% this morning (leading losers globally), they’ve gone from up +23% to +8% YTD in less than 2 weeks. Big Government Intervention perpetuates volatility. Nice.















The Hedgeye Macro Team



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