Not terrible but more evidence of a more competitive junket environment.



The data is in.  With the enhanced disclosure from MPEL, we can confirm that while the sky isn’t falling, junket commissions did tick up in the 2H11.  This is on top of a sharp increase in receivables – see our note this morning “MACAU: HIGHER RECEIVABLES”.  On a positive note, commissions barely budged on a YoY basis.  


The charts below show the composition by company of all-in commissions among the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  


Main takeaways: 

  • The gap between the lowest all-in commission rate and the highest commission narrowed considerably in 2011 to 4.3% from 6.7% in 2010 on a % of win basis and to 15bps from 18bps on a % of RC basis.  The compression was largely driven by junket commissions
  • Excluding comped non-gaming amenities (rooms/F&B), Wynn remains the least aggressive.  However, on a YoY basis Wynn’s rebate and junket commission (as a % win) increased 5% and 1%, respectively, from 1H to 2H2011.  
  • We were surprised to discover that MPEL actually had the lowest all-in commission rate on both a RC and % of win basis in 2H12.  Despite offering the largest junket commission, MPEL has consistently had the lowest comps on non-gaming amenities.  MPEL also offered one of the lower rebate rates, which is surprising given the relatively large direct premium play business at City of Dreams.

Other observations:

  • Rebate rates increased YoY and in the 2H of 2011 vs. the 1H
    • The average rebate rate for the year and 2H was 32.4% (as a % of win) or 95bps (2011)/96bps (2H11) (as a % of RC)  
    • Wynn had the lowest rebate rate in 2011 at 30.6%/90bps
    • MPEL had the lowest rebate rate in 2H11 at 30.0%/91bps
  • Junket commission increased YoY and in the 2H of 2011 vs. the 1H
    • The average junket commission increased 4% YoY (on a % win and RC basis) to 8.2%/24bps in 2011
    • In 2H11, the average junket commission was 8.4%/25bps
    • Wynn continued to offer the lowest commission rate in 2011 and 2H11
      • 2H11: 7.2%/22bps
      • 2011: 7.2%/20bps
    • MPEL continued to offer the highest commission rate in 2011 and 2H11
      • 2H11: 9.3%/29bps
      • 2011: 8.9%/26bps
  • Comped non-gaming amenities decreased YoY and but increased in the second half of 2011
    • The average non-gaming comps fell to 9% on a % of win basis to 4.2% in 2011 from 4.5% in 2010 and 5.5% in 2009
    • The YoY drop on a % of RC basis was 8% from 13bps in 2010 to 12bps in 2011 
    • In 2H11 the average non-gaming comps increased 8% and 11% on a % win and % RC basis, respectively, to 4.3%/13bps from 4.0%/12bps in 1H11
    • MPEL continued to offer the lowest comps in 2011 and 2H11
      • 2H11: 2.7%/8bps
      • 2011: 2.6%/8bps
    • LVS continued to offer the highest comps in 2011 and 2H11 which is not surprising given that they have the largest % of their revenue base coming from non-gaming amenities.  Comps as a % of win and RC have been steadily declining from 2008 to 2011.
      • 2H11: 6.3%/17bps
      • 2011: 5.8%/17bps
  • The all-in commission rate was flatish YoY but increased in the 2H of the year compared to the 1H to 46.5%/1.41bps
    • On a % of win basis, LVS paid the highest all-in rate at 49.4% in 2H11 and 46.9% in 2011.
    • On a % of RC basis, MGM was the biggest spender at an all-in rate of 1.41% in 2H11 and 1.4% in 2011.







FINL: Committed


This is not your average ‘in-line quarter.’ In fact, we chalk this one up as a miss and will likely watch it from the sidelines through 1H before getting more constructive.


Yes, EPS of $0.81 came in-line with Street estimates of $0.81E, but the composition of earnings was significantly different. The key delta relative to our numbers was in the SG&A line, which came in up +23% yy on +19% sales growth accounting for $0.07 in EPS. We were looking for EPS of $0.86 on +15.5% SG&A growth. In addition to announcing a new partnership and $10mm capital infusion from Gart Capital to build out the company’s run specialty business, FINL’s commitment to investment spending (IT, personnel, etc.) over the intermediate-term is clearly more substantial than we had anticipated.


The call here is not that underlying fundamentals have changed – in fact they were good (comps up +10.8%, GMs +120bps, and sales/inv spread up +5%), but that variable spending is headed higher, much higher near-term. As a result, management is taking Q1 EPS expectations down by (-30%) vs. +20%E. That’s not good for any stock in this tape. The company is also guiding earnings growth of MSD this year and low-to-mid-teen next year. That implies earnings power of $2 over the next two-years, but with greater risk and volatility along the way which does not support multiple expansion - rather quite the opposite.


While March sales up +10% month-to-date suggests the industry demand remains strong, the strategic commitment to building out the FINL organization will significantly curb earnings growth over the intermediate-term. As such, we’ll watch this one from the sidelines through 1H before getting more constructive.


Casey Flavin



FINL: Committed - FINL S




Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

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.

The Joker

“I’m a joker

I’m a smoker

I’m midnight toker

I get my loving on the run.”


-The Steve Miller Band


Technically speaking today is the last business day before April Fool’s Day.  Last year, as some of you remember, I pulled off a decent prank as I removed Keith from his post as CEO of Hedgeye and we replaced him with the The Most Interesting Investor In The World. 


For those of you that missed last year’s joke, I’ve posted the mock video of The Most Interesting Investor In The World directly below.  Our readers that are in tune with popular culture will recognize that it is a spoof of Dos Equis Most Interesting Man In The World:


In my opinion, although perhaps it is because I wrote the script for the You Tube video above, the best line is:


“He shorts naked, with his clothes on.”


But to be even more fair, April Fool’s Day jokes can at times completely miss their mark, especially in times like this when global macro markets really need our utmost focus.  So, this year, we are putting April Fool’s to the sidelines.


Ironically, or perhaps not, Steve Miller is from Wisconsin, which, setting aside the Republican primary battle, is really the current battleground of U.S. politics.  As ABC News wrote this morning:


“While the national media attention has been focused on the upcoming GOP primary in Wisconsin, there’s another political battle gearing up in the Badger State, and it involves both Democrats and Republicans.


On Friday, the Government Accountability Board of Wisconsin is expected to certify the 1 million petitions turned in in January to recall Republican Gov. Scott Walker. With a special gubernatorial election pending, Democrats and Republicans in the state are bracing for a tight race ahead.


A special election is tentatively scheduled for June 5, with a Democratic primary to take place four weeks earlier, on May 8. (Those dates will be made official after the recall is certified.)  Three Democrats have declared their candidacies – former Dane County executive Kathleen Falk, Wisconsin secretary of state Doug LaFollette and state senator Kathleen Vinehout.”


On many levels, the June 5 election will be a critical leading indicator for President Obama’s re-election chances.


On that front, President Obama currently has a 60.4 probability of getting re-elected based on InTrade.  This correlates very closely with the Hedgeye Election Indicator (HEI), which currently shows a 62.3 chance of Obama getting re-elected.  Our proprietary index is based on rigorous back testing.  In effect, we’ve determined that there is a short list of real time market-based indicators that move ahead of President Obama’s position in conventional polls.


Setting all joking aside, in the Chart of the Day, I’ve flagged a note passed along yesterday by my colleague Darius Dale in which he wrote:


“Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:


CBOE SPX Volatility Index (VIX);

Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);

CBOE Oil ETF Volatility Index (OVX);

JPMorgan G7 FX Volatility Index; and

JPMorgan EM FX Volatility Index. 


On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.”


So The Chart of the Day, no joke, shows that volatility, per Darius’s point, is at a very complacent level.  In fact, this is a level that previous flagged both U.S. equity market and global equity tops.


The global macro action this morning is once again in Europe.  Eurozone Financial Ministers are meeting in Copenhagen today (beginning at 11:30am GMT) and tomorrow to discuss strengthening the region’s firewall via EFSF/ESM.  As well, Rajoy will present Spain’s 2012 budget this afternoon with a statement expected around 12pm GMT (deficit target 5.3% of GDP down from 8.5% last year).


If there is one key red flag this morning in Europe it is from Germany.  Specifically, German February retail sales came in weaker at -1.1% month-over-month versus the estimate of +1.1%.  Now, clearly, this is but one data point, but Germany is definitely the positive bell weather in Europe to focus on. Well, until Germany turns negative.


As it relates to our negative thesis on the Yen, this morning we had two supportive data points:


1. Japan Industrial production unexpectedly fell as strengthening yen hurt outlook for exporters earnings; and

2. Japan February consumer prices unexpectedly increased +0.1%  year-over-year versus -0.1% estimates.


But data points, as always, are only data points.  So, this morning I will leave you with one last quote from Steve Miller:


“The question to everyone’s answer is usually asked from within.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $122.25-124.67, and 1, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Joker - Chart of the Day


The Joker - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 30, 2012












  • ADVANCE/DECLINE LINE: -662 (238) 
  • VOLUME: NYSE 817.38 (0.04%)
  • VIX:  15.48 0.06% YTD PERFORMANCE: -33.85%
  • SPX PUT/CALL RATIO: 1.49 from 3.16 (-52.85%)


  • TED SPREAD: 41.22
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 2.16 from 2.16
  • YIELD CURVE: 1.82 from 1.82 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal income, Feb., est. 0.4% (prior 0.3%)
  • 8:30am: Personal spending, Feb., est. 0.6% (prior 0.2%)
  • 9:45am: Chicago Purchasing Mgr, Mar., est. 63.0 (prior 64.0)
  • 9:55am: UMich Confidence, Mar. F, est. 74.6 (prior 74.3)
  • 10am: NAPM Milwaukee, Mar., est. 58.0 (prior 58.6)
  • 1pm: Baker Hughes rig count 


    • Secretary of State Hillary Clinton in Riyadh, Saudi Arabia, meets with King Abdullah regarding regional security and Syria
    • President Obama travels to Maine and Vermont for campaign fundraising
    • ITC holds meeting on the economic effect of the addition of certain products to the list of items eligible for duty-free treatment, 9:30 am
    • FTC Bureau directors speak at antitrust conference, 8:15am 


  • Consumer spending probably climbed 0.6% in Feb., economist est., as Americans bought more cars
  • FTC decision may occur today on Express Scripts and Medco Health antritrust law violation claims
  • Research in Motion said it plans to refocus on business market, will consider partnerships and joint ventures
  • BP said the U.S. govt. is withholding evidence that would show the oil spill in the Gulf of Mexico was smaller than claimed
  • Wells Fargo and SEC lawyers told to meet to discuss documents related to a probe of mortgage-backed securities
  • Pfizer judge certifies class action in Celebrex, Bextra suits
  • Euro-area March consumer prices climbed 2.6%, more than est.
  • Deadline for private-equity, hedge funds to meet registration requirements with SEC under Dodd-Frank


    • Finish Line (FINL), Pre-Mkt, $0.81    


  • Copper Traders Most Bearish in Two Months on China: Commodities
  • Gold, Poised for Quarterly Advance, May Gain on Weaker Dollar
  • Oil Rises From Year’s Biggest Decline as Finance Ministers Meet
  • Copper, Set for Quarterly Increase, Climbs as Equities Advance
  • Soybeans, Headed for Quarterly Gain, Rise as Sowing May Stagnate
  • Robusta Coffee Slides as Producers May Be Selling; Sugar Rises
  • Carbon Like ‘Titanic’ Sinking on EU Permit Glut: Energy Markets
  • Floating Windmills in Japan Help Wind Down Nuclear Power: Energy
  • Gas Extends 10-Year Low as Inventories Gain More Than Expected
  • Iran Sanctions Fuel ‘Junk for Oil’ Barter With China, India
  • Oman Oil Output to Rise Next Month as Harweel Field Starts
  • Japan’s February Oil Imports From Iran Fall 32.7%, METI Says
  • Japan Expects Feed-Wheat Imports May Jump 82% Next Fiscal
  • Copper Traders Most Bearish as China Slows
  • GrainCorp at Lowest Valuation Seen Ripe for Plucking: Real M&A
  • Stalin’s Siberian Enclave Revives as Putin Seeks Mines for China
  • O’Neill Says He’s Not Convinced Oil Prices Going Up Further











GERMANY – February retail sales come in weaker at -1.1% versus the estimate of +1.1%. 






JAPAN – Industrial production unexpectedly fell as strengthening yen hurt outlook for exporters earnings; and Japan February consumer prices unexpectedly increased +0.1% versus -0.1% estimates.










The Hedgeye Macro Team







This note was originally published at 8am on March 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The downside to thinking statements are more complicated than plainly stated, is that what is plainly stated is more often than not the truth when arrived at the long way around.”

-Rob Shewchuk


Rob Shewchuk is a long time friend of Hedgeye and also many moons ago played junior hockey with our CEO Keith McCullough for the Pembroke Lumber Kings.  If the moniker Big Alberta fits me, I think it is fair to say that Big Ontario fits the 6’3”, cowboy boot wearing Rob Shewchuk.  Rob grew up in the mining town of Red Lake, Ontario and has parlayed his natural business instincts into becoming one of the top brokers in Canada, with a special focus on undervalued mining assets and emerging growth companies.


Rob and I were texting each other about a common business situation and he put on his Red Lake philosopher’s hat and sent me the above quote.  As a bachelor who is still in full dating mode, I’ll be the first to tell you that text messages can lead to confusion, but I think the message Rob was sending was pretty clear: keep it simple.


In investing, complexity negatively infiltrates the investment process in a number of ways.  One way is analysis paralysis.  Undoubtedly, we’ve all worked with analysts that are guilty of this crime of complexity.  The guilty analyst will have a 75 page spreadsheet analyzing a company down to the return on capital of the administrative assistant to the head janitor, but won’t be able to make a call on whether the stock is going up or down.  The analyst knows so much, he or she is in fact paralyzed and unable to make a decision.


The other crime of investing complexity, which is more to Rob’s point, is when an analyst complicates simple things, like say valuation.   A friend of mine from home says that when it is – 40 degrees Celsius out, you don’t need to ask how cold it is, you just know it is *expletive* cold.  The same could be said for valuation.  If a stock or asset is cheap, you shouldn’t have to argue it’s cheap, or justify that it is cheap.  The valuation will be plainly obvious.


Yesterday, to the last point, I wrote a research note on the valuation of the SP500.   Many stock market pundits are making the case that the SP500 is cheap based on future consensus earnings. Unfortunately, that analysis is not really all that simple, for the basic reason that consensus estimates are usually wrong.  In fact, according to a McKinsey study from 1985 to 2009, SP500 earnings estimates were higher than the actual reported number 92% of the time.


So, obviously when making the simple valuation call, it depends on the complexity of the underlying estimates. When looking at the valuation of the SP500, we prefer to use CAPE, or cyclically adjusted price to earnings.  CAPE is a metric popularized by Yale Professor Robert Shiller that looks at a market P/E that is adjusted for inflation and normalized for cycles.  Currently, CAPE is showing that the SP500 is trading 21.9x, which is the highest level since July 2011 and in the top quintile of market valuations going back to 1880 (before even I was born).


CAPE hit a 35-year low in March of 2009 at 13.4x. This also coincided with a low in other stock market valuation metrics and the bottoming of the market.  Stocks were, simply, and obviously, cheap.  As for now, it is neither simple, nor obvious.


As of late, we’ve been flagging and harping on another simple indicator of the equity markets peaking, which is the VIX.  The Chart of the Day today goes back exactly three years to the bottom in March 2009 and compares the SP500 to the VIX over that period.  As the chart shows, a VIX level of 15-ish has coincided consistently with a short term top.   To the simpletons at Hedgeye, that is a red flag worth emphasizing.  More simply, the VIX at this level signals that complacency is setting in.


Over the last 24 hours, we’ve made a couple of simple moves in the Virtual Portfolio that should inform you on our current positioning:


1.   Shorted Greece via the etf GREK – With “positive” catalyst of the Greek debt restructuring in the rear view mirror, Greek equities now have to deal with austerity headwinds and a population that is leaving Greece en masse.


2.   Shorted SP500 via the etf SPY – Selling the SP500 at our overbought line has a high historical batting average and at 1,401, the SP500 is overbought.  Yes, it can be that simple.


3.   Shorted consumer discretionary via the etf XLY – With oil prices and inflation accelerating, this isn’t good for growth or discretionary spending.   Historically, growth slows when oil reaches 5.5% of GDP. Simplistically, a Brent oil price of $116 equates to 5.5% GDP and Brent is currently at $123.


Henry Wadsworth Longfellow also had a great quote about simplicity (although he didn’t text it to me), which was: "In character, in manner, in style, in all things, the supreme excellence is simplicity."




Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Simpletons - 11. CHart of the Day


Simpletons - 11. VP 3 16

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.