MGM confirmed rumors that it is selling Treasure Island (TI). The purchase price is $775 million and we estimate net proceeds will be in the $700-725 million range after a decent sized tax bite. The company expects the transaction to close in Q2 2009, which is an important quarter for another reason. Absent new financing, we estimate MGM will trip the leverage covenant in its credit facility during that quarter. If it doesn’t happen in Q2, a covenant bust is virtually a mathematical certainty in Q3.

The TI sale looks like a non-event. Near term liquidity is improved but the multiple was just ok. Most importantly, the covenant situation is essentially unchanged. The chart below provides estimated quarterly leverage ratios against the maximum allowable ratio as provided in the credit agreement. This is the biggest issue facing MGM right now. Investors should expect a highly dilutive equity offering in the coming months or a sharp rise in the company’s borrowing rate should they choose to renegotiate their credit facility. Neither of these options will be good for the current equity.

It's a bust!

SP500 Levels Into The Close...

Today’s failure to breakout through the “shark line” (SP500 867) to our immediate term target of SP500 916 is what it is for now – wrong. We try our best to call markets and how they interact, daily. This is not an excuse. This is what it is – we won’t be right 100% of the time, but we will miss 100% of the shots that we don’t take (Gretzky).

As I am writing this note, the SP500 is testing its lows of the day at 859. From that line, the balance of risk/reward is very straightforward, playing to the bullish side’s favor. Downside is -2% from here; upside is +6.5%.

BUY “Trade” = 841.11
SELL “Trade” = 915.68

“Heli-Ben” will be dropping moneys from the heavens in t-minus 24 hours. That will be bullish, on balance, for stocks.

Looking Back; Looking Ahead: Two China Charts ...

Some of the revisionist historians are getting themselves in a heat today about how bad this Chinese industrial production number was. While we agree with the facts that September-November was a period of deteriorating growth, we do not agree with the idea that January will represent another sequential deterioration.

Today, for the record, is December 15th, and markets trade on what happens tomorrow, not last month. Both China and Hong Kong closed up overnight, despite this “news.”

The more interesting chart is the second one below, simply because it’s a proactive prediction of what tomorrow (January 2009) may bring. The Chinese stimulus plan is math, and we can draw conclusions from it. We remain bullish on China and suggest that those who have missed the recent +20% and +40% moves in the Shanghai and Hang Seng indices, respectively, find room in their portfolios to buy China on down days.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Kruger’s Frau Nein

In Paul Krugman’s Op-Ed piece today in the NYTimes he teed-off on Germany, in particular framing Chancellor Merkel and her economic officials as the “biggest obstacles to a much-needed European rescue plan.” This in reference to Merkel’s meeting over the weekend in Berlin to discuss Germany’s contribution to the EU stimulus package.

Krugman’s criticism, which matches that of other European nations, relates to Germany’s inability to name their contribution in Euros that some project to be too low. Krugman took this sentiment to accuse Germany as the lone kink in the chain to setting this package in motion. In our view this is a bit shortsighted. Taking a step back, any time the European community comes together to make a group decision, consensus is never a guarantee; in fact, regional and economic differences play a huge role.

Just last week EU leaders agreed to spend €200 billion, or 1.5% of the bloc’s GDP, to bolster growth. Yet few governments have matched this target number with new spending or tax relief, prompting renewed discussion and a closer look at individual contribution on a per country basis. As an example of the disparity among EU nations on GDP basis, Germany’s Q3 GDP totaled €567 Billion versus Belgium at €83 Billion. Certainly Germany will pay a larger piece of the EU stimulus pie than Belgium, which may not directly benefit Germany in the long run.

Germany currently says its proposed package represents 1.3% of GDP. This comes at the heels of Merkel’s issuance of a €400 billion banking stimulus to guarantee loans. According to the WSJ, “a senior German official said Germany is waiting until US President-elect Barack Obama takes office and enacts his own stimulus program (to name theirs),” which if true, means the EU will have to be patient.

Germany, arguably the strongest economy in Europe and the biggest market for exports from the 27 nation EU, is sending a signal in dragging its heels—one that shows its cautious nature, but more importantly, implies that its economy may not need as much stimulus as the rest of Europe. The government looks to be buying time to run the cost/benefit numbers to determine what type of stimulus package will lead to growth both domestically and within the Union, as opposed to making a reactive decision.

In The New Reality, we want to own the patient and proactively prepared. We remains long Germany via the EWG etf. Today the EWG is outperforming most of the top 10 in this world’s country GDP tables. Slow and steady works for us.

Matthew Hedrick


Anyone paying attention to the Yen? It’s had the biggest run vs. the dollar in 13 years over the past 4 months. With a 26% run since August and 34% boost vs. last year, any company with exposure is likely to get a shot in the arm as it relates to top line translation. Keep in mind that this is NOT because the local economy is in overdrive. In fact, last week he final cabinet Office tally for Q3 GDP came in at a decline of -1.8% as the full impact of the global slowdown reverberated through Japan’s export industries.

If you read our Macro team’s work regularly you know that we think Japan bulls looking for a glass-half-full scenario in which US and EU government stimulus packages shore up demand are going to be sorely tested as they wait for income derived from public works projects to be converted into flat screen TV purchases. Furthermore, we don’t see domestic demand helping to close the gap in Japan: BOJ has only 30 BP of wiggle room left and, if consumers there were content to build of $15 trillion in the zero rate environment that ended less than 3 years ago presumably they won’t be rushing out to spend now.

Nonetheless, the market is not likely to care about the Macro angle when these luxury goods companies report the upcoming quarter and see favorable translation – presuming that they don’t lose control of any Yen-denominated inventory). Here’s who benefits the most (% of sales in Japan).


Goldman Sachs upgraded the gaming technology sector (slots) this morning. While I don’t necessarily disagree with the pick that BYI is the most attractive in the sector, the overall call looks early and, quite frankly, wrong on many levels.

The following is a point-by-point retort:

• New states will expand gaming:

Yes, states are in a downturn and could be looking for new gaming sources. Ohio, New York, Kentucky, and Texas are cited as contenders. Even if any of these states pass gaming legislation next year (unlikely in our opinion), history shows us it will be another 2-3 years before a slot machine is sold.

• Slots are a high IRR purchase:

This is a static argument that sounds like it is coming from a slot salesperson. In a vacuum, a new slot does pay for itself in a couple of months. However, new slots just steal revenue from other slots in the casino. Casinos only buy them because they have to stay competitive with their neighbors. How do I know? Same store slot revenue hasn’t grown in a long time. Moreover, as we discussed in our post, “SLOTS LOSING OUT TO TABLES”, slot handle is on a 5 year decline relative to table drop.

• Tribal gaming, international, and Maryland will drive growth:

Tribal gamers won’t be buying slots any time soon (“TRIBAL GAMING IS SUFFERING TOO”, 11/28/08) and Maryland is probably 3 years away from buying slots. The international argument has been out there for awhile but Asians aren’t embracing slots “ASIAN SLOTS: SELLING HAGGIS TO VEGANS”. Where else is gaming expanding?

• Replacement sales should start to turn in 2010:

OK, I’ll give you this one, only because 2009 is going to be horrible. Estimates don’t seem to reflect this yet.

• Viewing slots as a derivative way to play an improving consumer without the balance sheet risk:

I don’t know what the macro guys are projecting at Goldman but we don’t see an improving consumer for quite some time. Gaming technology companies do have strong balance sheets.

• Low historic and relative valuation levels:

Mid-single digit free cash flow yields don’t make a value guy like me want to run out and buy the sector.

I will say that BYI and IGT do look cheap on P/E and EV/EBITDA metrics while WMS continues to look expensive. Consensus estimates need to come down for the whole space in my opinion. Maybe that will be the catalyst to look at the space for a 2010 turnaround.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.