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WYNN: PRE-ANNOUNCING THE GOOD STUFF

Wynn Resorts held a spot conference call to outline a cost reduction program that will save the company $75-100MM annually. Salary reductions and hourly cutbacks in Las Vegas will drive the majority of the savings. Management wouldn’t comment specifically on earnings other than to say that there will be a lot of “non-recurring” expenses.

The value added of this call to investors is limited. Why not at least provide some preliminary operating numbers? One explanation could be that they are still working their way through what expenses to classify as non-recurring versus being included in operating EBITDA. Starwood recently reported a quarter with over $350 million in “non-recurring” expenses that will no doubt benefit margins in future periods. WYNN definitely laid the groundwork for some big charges.

Margins are the wild card for Q4 and 2009. We are pretty sure the top line will be well below formal estimates as will true EBITDA. Street consensus revenue estimates of $737MM and $3.50bn for Q4 2008 and full year 2009, respectively, are probably each too high by about 10%. This is not a new call for us. We wrote about a potential earnings shortfall back in our 12/10/08 post, “NOV MACAU MARKET SHARE ANALYSIS”, and again in our 1/9/09 post, “WYNN: IT’S NOT JUST Q4 I’M WORRIED ABOUT”. After last night’s call, our call will now be the consensus call.

Finally, A Flurry of positives For The US Stock Market...

"Senate Republican plan proposes cutting U.S. Corp. tax bracket to 25% from 35% for 1 year"
-Reuters

While this isn't a new conceptually, the timing matters relative to the market's expectations. God knows people are bearish out there, but the US Dollar and VIX are breaking down here through important levels of support. These factors, combined with tax cutting rhetoric, are going to be hard for the bears to fight.

Keep moving out there - we've been investing our oversized cash position. If the US$ goes down, stocks are going up.
KM

STIMULUS FOR POTENTIAL BREACHERS

In “THE INDUSTRY THANKS YOU, MR.ENSIGN” (01/13/09), we highlighted the benefits that highly levered gaming companies may see coming their way as a result of a piece of legislation proposed by Nevada’s own Senator John Ensign. Ensign’s Senate Bill would have eliminated the negative tax ramifications of buying back discounted bonds. Unfortunately, SB33, due to a lack of sway on the part of the Republican Senator proposing it, has little chance of passing.

While not quite as attractive, a provision allowing companies to spread the tax bite of discounted buybacks over eight years is included in the stimulus package currently being wrangled in Congress. When all is said and done, it’s possible that some or all of the tax on bond buyback gains could be eliminated altogether. This provision would provide significant incentive for heavily leveraged companies to buy back their bonds. For example, a company buying back bonds at 60 cents on the dollar would de-lever by about 26 cents (40 cents less the tax bite). If the provision is in place, the company could defer that 14 cent tax.

This provision is almost written for the gaming sector. BYD, MGM, ISLE, and PNK all face potential leverage covenant breaches, but have ample liquidity to buy back discounted bonds. Less taxes = more de-levering.

Rory Green
Junior Analyst

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Eye On Australia: Is Hope All That Remains?

EYE ON AUSTRALIA: RATE CUT
At a 45 year low with more room to go, will it be enough?

As forecast by most, the Reserve Bank of Australia lowered its benchmark cash rate by 100 basis points today. At 3.25%, Aussi rates are at a 45 year low, and now they can only hope that easing credit combined with the governments $27 Billion ($42B AUS) stimulus package will provide a cushion down under. The ASX 200 rose +0.35% on the news .

For Glenn Stevens the game plan will now shift to “wait & see” as the next step in recovery is largely out of their hands. Although at this stage the RBA still has room to cut, the only prospects for sustaining growth at levels seen over recent years rest on a rebound in external demand for base metals and energy & agricultural commodities. In effect, the rate cuts and stimulus package in Australia, at best, may help keep the country on a relatively even footing while it waits for Beijing’s stimulus package to kick in.

We will keep our eye on Australia and the EWA etf. While we admire Governor Stevens for the resolve he showed during the bubble period, for now we are not involved in Australian equities. We will be watching for signals that are beyond his control.

Andrew Barber
Director

Daschle Withdrawl: What's The Macro Call?

From our Healthcare Sector Head, Tom Tobin:

"This is positive for healthcare. Delay to name a successor when timing is everything in getting major Heathcare Reform done. Also negative for the dollar as entitlement spending remains a long term budget risk."

KM Macro Read Across:

1. Healthcare (XLV) is now +1.7% on the day - we are long that ETF.
2. US Dollar (UUP) remains weak today - we are short that ETF.
3. US Dollar weakness augurs positively for US stocks in the immediate term.

Ruble Rubble

Russia’s currency shows signs today of stabilization after a week of consecutive drops and a pledge by Bank Rossii Chairman Sergey Ignatiev on January 22 to insure that the Ruble stays within its 41 target level versus a Dollar/Euro basket.

We’ve been following the Ruble’s slide in our playbooks as the slump in oil prices over the past six months has weakened Russia’s energy economy. In trading yesterday the Ruble touched its lowest level against the Dollar at $36.3550, just short of the critical 36.45 per Dollar level to break through its band versus the Dollar/Euro basket.

Russian foreign-currency reserves, the world’s third largest, currently stand at $386.5 Billion from a July high of $462.7Billion, a decline of -16.8%, as the central bank attempts to offset the Ruble’s slide. The question remains: will these measures be enough to right the Russian ship, and equally, what degree of tail risk could be associated with Putin’s attempt at a “gradual and careful” devaluation over the last weeks?

Already the numbers look atrocious: the Russian stock market is down -79.4% from its high on 5/21 last year and down -15.3% YTD. The Ruble has lost -56.2% versus the USD since its low on 7/15/08. Just last week the IMF forecasted Russian GDP at -0.7% for 2009, which we think is too aggressive an estimate.

In this recessed environment a weaker Ruble will encourage exports yet will increase the cost of imports and aggravate domestic inflation. Further, a weaker currency and an unstable market encourages investors to flee to safer investment havens, which has already begun, with withdrawals equaling ~$290 Billion leaving the country already.

Should oil hold around the $40 range, we expect Russia to run a much larger deficit than the IMF prediction. The Ruble’s low against the Dollar and Euro begs the question if Russia will be able to maintain the trading band as the governments hopes for an oil reflation trade. If you’ve read our work hope is not a valid investment process.

Matthew Hedrick
Analyst

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 80.64%
  • SHORT SIGNALS 78.57%
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