Vegas Sucks

Sorry, but there’s really no other way to put it. We’ve been pretty bearish on MGM Resorts (MGM) with our estimates on the company’s numbers coming in way below the Street consensus. We may need to revise downward after the latest May data on the Vegas Strip. Basically, Vegas is performing poorly (and that’s putting it lightly) and even offering one of our managing directors a $24 hotel room at Excalibur. If that doesn’t scream of desperation, then let us know what does.



Vegas Sucks - VEGAS 3mo



The Strip’s gross gaming revenue fell 18% year over year in May. That’s a huge drop. Baccarat is struggling and slots ruled in the month of May. It’s looking pitiful out there and MGM is going to have a rough quarter.


Here’s the story, by the numbers:


•             Slot handle fell 7% off of a relatively easy comp

•             Slot win lost 3% despite higher than normal hold

•             June hold may be below normal due to end of month on Saturday

•             Baccarat  (bacc) win fell 47%, on hold of 8.2% (TTM: 12.5%); baccarat volume fell 22%

•             Table win ex bacc fell 18% on below average hold of 10.3%;

•             Table volume ex bacc grew 2%

•             Hold-adjusted total win was -11%

HedgeyeRetail Visual: FNP Levels For Top Long


On our Q3 Themes earlier today, we highlighted FNP as our top long here. We think it’s a gift at this price. With the stock below $9.50, it equates to Kate Spade trading below 11x 2013 EBITDA alone.

The chief concerns weighing on the stock here is how Juicy is tracking and the slowdown in global luxury. Juicy is a 2H story and Fall product just hit shelves this week so a bit premature perhaps, but keep in mind that Juicy accounts for less than 10% of EBIT - it does not make or break this story. As for the global slowdown, it’s reality. But this is a massively underappreciated budding global growth story that can buck the Macro backdrop.

With $1 in earnings power and a sub-$10 stock, we can’t find a better risk/reward setup in retail.


HedgeyeRetail Visual: FNP Levels For Top Long - FNP TTT



Industrial Indicator: CAT & Mining Investment Bubble

Chart of the Day

  • Current levels of capital investment by miners is at bubble-like levels
  • If D&A represents an estimate of maintenance capital spending, current capital spending is heavily skewed toward increasing output
  • Mature, cyclical industries (mining is among the most mature) do not support high levels of growth investment in the long-run

 Industrial Indicator: CAT & Mining Investment Bubble - Mining Capital Spending

  • Caterpillar has outperformed, with a millennium-start to date total return of 393% vs. 16.9% for the S&P 500
  • Caterpillar’s success is heavily dependent on this explosion of investment by miners.

 Industrial Indicator: CAT & Mining Investment Bubble - cat rel spx


Upcoming Events:  Truck OEM Black Book


Industrial Indicator: CAT & Mining Investment Bubble - perf 71212


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Notes From Our Q3 Retail Call


Not a lot of buys in retail. On the short side: Macy's, Carters. On the long side: Fifth and Pacific (formerly Liz Claiborne), Nike.


JCPenney: Let’s beat a dead horse, shall we? Consensus is finally in: JCP is not performing well. Spain is 13% GDP relative to Eurozone, JCP is that to retail. Their impact on the industry is huge. Their strategy is to taken an item that sold last year for $100 and mark it to $25. They get consumers to appreciate that and want them to come to their store all the time. They need great product and aren’t there yet.



Notes From Our Q3 Retail Call - Q3RETAIL slide1



Over the past 5 years during the recession, the consumer sought out more discounts. Moms used to go into Macys and bring a ton of coupons and wait for an item to get marked down. That’s hard to ween people off of.


What brands are JCP putting out there for you to buy? Which are stuck by the bathrooms?


Why can’t JCP go bankrupt? It can. Who cares about Bill Ackman and what he thinks – remember Borders?


Kohl’s: Going head to head with JCP. Over past two months, getting creamed by competition. Turnaround needed on operating asset turns. The stock is cheap on next year’s estimates? Not a chance. It can go lower.


Dollar stores: Very negative outlook. (pg 20) Relative to the S&P 500, massive earnings growth in 2010. We don’t think comps will grow and the same goes for new stores –do we really need more dollar stores?



Notes From Our Q3 Retail Call - Q3RETAIL slide3



Food stamps also have a huge impact on margins for dollar stores. A ton of people are on food stamps and the surge in those receiving food stamps during the recession definitely helped dollar stores grow. Since January 2011, we’ve had salaries decline year over year. Consumption is up, however. We need more spending, less saving. We are well below consensus on earnings announcements going forward. Big drop in stock prices coming.


Capital intensity: Retail at sky high valuations. High returns relative to other industries. Peak margins. Stable earnings. We’re about 8 quarters into a decline in capital reinvestment period yet sales are up at a healthy level. If we’re coming off an investment period and we want to harvest, a few thing need to happen: the consumer needs to be strong or the company needs to put capital into capital expenditures (capex), which will hurt margins. Or they can have their top line rollover.


We like companies investing in all the right areas. Those who want to grow e-commerce sales who want to grow 10%-50% online because eventually, that’s where everyone’s going to go.


Notes From Our Q3 Retail Call - Q3RETAIL slide2


Fleeing The ECB

So last night, the European Central Bank’s (ECB) 0.00% rate for deposits kicked in. What would you do if your savings account was earning literally zero interest? You’d probably pull it and that is exactly what happened last night. Deposits on hand at the ECB dropped from €808.5 billion to €324.9 billion – that’s a 60% drop!



Fleeing The ECB - ECB deposits



But this is potentially a positive catalyst for a weathered Eurozone. We anticipate that these funds will be put to work for both public and private lending. But we caution that more borrowing encouraged by cheap money is not a solution for Europe’s debt problems.


The point is: watch what the ECB is doing. Knowing how it interacts with Eurozone countries is pivotal to success.



In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.




  • WORSE - Quarter was in-line but low quality and guidance was effectively reduced 





  • SLIGHTLY WORSE:  Supply growth continues to slow but MAR is not too concerned
    • As expected, MAR saw a slow down in supply growth in China similar to what they discussed on their last call. However, the slow down must have been more than what they expected since delays in China were a leading driver to lowering room openings by 5,000 in 2012. The government suggested slowdown in construction has caused some projects that were under construction to get temporarily put on hold until the governments gives their blessing for growth to resume. 


  • IN LINE:  Group bookings pace for remainder of 2012 is 10% just a touch below the 11% pace at the end of March 
    • Booking pace remained strong for the balance of 2012 and 2013 booking pace is up 8% thus far.


  • SAME: As expected, ME RevPAR improved from the 6% decline seen in 1Q12
    • MAR expects the ME to perform 'reasonably well' for the balance of the year as occupancies improved compared to last year’s interim spring results. However, travel wholesalers still aren’t jumping back into the market and therefore continued volatility in this market is expected


  • WORSE:  They are now expecting 5k less room openings and 9k rooms leaving the system.  They continue to have slippage in opening dates for some new hotels in Asia, Middle East and Mexico. 


  • SAME:  Maintained 20% for FY 2012


  • SAME:  Weak European economies will continue to be a headwind. European REVPAR outlook hasn't changed from previous guidance
    • Benefit of the Olympics and the Eurocup will be somewhat counteracted by weaker macro. Expect 3Q to be a little above 3% and 4Q to be a little worse 


  • BETTER:  Very strong performance at leased hotels in Tokyo and London partly contributed to outperformance and raised guidance in the owned, leased and other revenue segment


  • BETTER:  Expect DC to improve in 2H 2012 and 2013, due to strong group bookings 
    • Group revenue bookings in DC for the Marriott brand are up 10% for 2H12 and 16% for 2013. 2013 should be a good year overall in this market

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.