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“… modern finance has changed the world, and not in a way that we should celebrate.”

-Roger Lowenstein


That’s what one of my favorite economic historians, Roger Lowenstein, wrote in a provocative Bloomberg article in May titled “Banks’ Hyper Hedging Adds To Risk of Market Meltdown.”


Market meltdown? Shh, keep that on the down low. That only happens in other people’s markets. With the almighty American “but earnings are great” season showing the worst beat-miss spread for US corporate revenues since Q3 of 2008, everything in the US stock market is going to be fine, provided that Bernanke does more of what has not worked.


The sad reality of the culture of short-termism that we have perpetuated in both our politics and banking system is that when the revenue misses ramp, the pressure to cheat does too. Whether it’s guys marking up their books into month and quarter end, or gals rolling the bones on black into a central planning event, it’s all one and the same thing – unsustainable.


Back to the Global Macro Grind


That probably all made less sense to you with the SP500 at 1376 last Thursday or at 1419 last quarter. But, after 4 consecutive down days (-2.8% correction) in US stocks and The #GrowthSlowing risk management signal (10 year Treasury Yield) hitting a freshly squeezed morning YTD low of 1.40%, that darn Canadian hockey player is going to show up on the score sheet again.


If you peel back the onion to when this whole thing started to unravel (2007), it’s a lot easier to agree with me that we are not only behaving Japanese from a policy perspective, but that both our stock and bond markets are too.


Lower long-term highs on lower and lower stock market volumes became the norm in Japan inasmuch as people piling into “expensive” Japanese Government Bonds did. That’s been going on for 20 years. Bernanke has only been at this for six.


To review, what Bernanke is doing by attempting to maintain a 0% return on fixed income savings accounts in perpetuity is superimposing what we have coined as “3D Risk” on all macro markets:

  1. The Dare – he’s daring you to chase yield (make sure you get those high dividend stocks as the companies miss revenues!)
  2. The Disguise – he’s distorting the long-term asset allocation “opportunity” in financially liquid assets like Gold and Oil
  3. The Delay – he’s inspiring companies to delay financial restructuring under the assumption that cost of capital will never go up

All the while, he’s failing miserably to achieve either of his 2 “mandates” (full employment and price stability). Five years into this mess, we have an unemployment disaster and the highest levels of market price volatility ever.


Did I mention ever is a long time?


The best news we’ve had this week is that Ron Paul had a big win getting his “Audit The Fed” bill passed in the House by a rock solid margin of 327-98. In response to the victory, Dr. Paul said “it is up to us to re-assert ourselves.” Amen to that.


Bernanke’s response: “this is a nightmare scenario.”


Yes it is Ben, for you.


I like to fight. I really like Fighting The Fed (Q2 2012 Hedgeye Global Macro Theme). But I also like timing – as in what a lot of people say they cannot do (take their word for it, they can’t). And once again, with Johnny Hilsenrath at the WSJ floating another Fed rumor ahead of next week’s FOMC decision, the timing game is on.


The manic media is as complicit in this entire gong show of Expectations Mismatch as anyone else. One of the top economic headlines on Bloomberg this morning is “Central Banks Search Tool Kit for Untried Ideas Amid World Slowdown.”




Bernanke talked about “tools” in his latest testimony. While it should scare the hell out of you at this point to hear about more “untried ideas” coming out of the government, allow me to define the 2 main tools Bernanke is talking about:

  1. Printing Money, Monetizing Debt, Bailing Out Losers, etc.
  2. Whispering through Fed mouth-pieces

Bernanke’s boys at the Fed and Treasury will be whispering about my calling them whispers (they call them “communication tools”). Whatever you want to call them, they are what they are – they drive the biggest risks to bank prop trading and asset management hedges that markets have seen since WWII – #expectations.


Shakespeare said expectations are the root of all heartache. With the SP500 down -1.8% for July and Q312 to-date, Bernanke’s mouthpieces may be creating the biggest risk of them all. If Lowenstein’s “market meltdown” happens from here, the central planners will see that this time is different. They’ll have no one to blame but themselves.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1, $100.73-103.91, $83.35-84.14, $1.20-1.22, 6311-6433, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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JCP: Game Changers Cost Money

JCP closed up nearly 5% this afternoon following a tweet from the company’s new fashion curator Nina Garcia who said the new prototype is a “game changer.” Game Changers cost money- lots and lots of it.


Over the past Week, JCP has provided investors with several updates regarding its transformation from 400 brands to 100 shops which has put the stock back up above $22 from last week’s $19.06 low. Here are some details:

  • Nina Garcia was announced as JCP’s “Resident Style Voice and Fashion Curator” on July 18th; Garcia is currently the Fashion Director of Marie Claire Magazine and Project Runway Judge.
  • On Monday Afternoon, the company released details regarding its first 10 shops that will go into 700 of its 1100 stores by year end and some additional detail around the new format:
    • August is all about Blue Jeans- 6 shops will debut (one in Men’s, one in Women’s per brand) with merchandise from Levi, Buffalo Jeans and Arizona. These will hit 683 of the 1100 doors though merchandise will be available chain wide.
    • The Levi shop will feature 88 washes and 11 cuts ($40 a pair) and will offer shopping help through the denim bar which will be equipped with ipads to provide additional detail on each fit.  
    • September- Izod men’s shop, Liz Claiborne women’s, and one “JCP” branded shop per gender.
    • Checkout Counters will be replaced with seating areas with sofas and long tables boasting built-in ipads and wireless internet.
    • Town Square- Kicking off in August with free haircuts for elementary age students.
    • Eliminating the 96 page monthly book which will be replaced by 2 weekly circulars that will focus on the new merchandise being offered (i.e denim in August).
  • This Morning, the Joe Fresh shop was announced and will hit stores in April 2013 with a 1,000 to 2,500 square foot footprint across 700 stores.


As Canada’s largest apparel brand and priced similar to H&M, Zara and Top Shop, we think the Joe Fresh shop is a net positive from a brand perspective given the first 10 shops opening this year are legacy JCP brands with the addition of 2 “JCP” branded shops. Ron Johnson and Team will need to introduce several more new brands to drive the level of traffic and conversion required for the new concept to truly be a “game changer.” Regardless, “Game Changers” cost money- lots and lots of it, and JCP's got none of it (notice the nicely timed REIT sale days enforce end of the q). Sad.  


JCP: Game Changers Cost Money - nina garcia COTD


JCP: Game Changers Cost Money - Joe fresh shop


JCP: Game Changers Cost Money - joe fresh image

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At least Bethlehem produced a beat



"While our quarterly results did not meet my expectations, and were impacted by lower hold on table games play compared to last year's second quarter, higher provisions for accounts receivable at Marina Bay Sands in Singapore, and elevated legal expenses, our financial results reflected solid revenue growth overall and significant cash flow in both Macao and Singapore, as well as the continued steady execution of our Cotai Strip development plan in Macao."


Mr. Sheldon G. Adelson, chairman and chief executive officer




  • According to LVS, they would have made $107.5MM more of net revenue if they held normally across the board and EBITDA would have been $932.6MM on a hold-adjusted basis ($88MM of an add back)
    • They only adjusted if the hold fell outside of 2.7%-3% range
    • We obviously got a much lower adjustment when we adjusted to historical hold for each property
  • $29MM impact from larger accounts receiveable charge at MBS
  • SCC has performed well and has been well received by customers. 
  • Investments in Cotai are allowing them to exceed market growth rate
    • Obviously
  • SCC won't truly hit its stride until next year when all the phases are open
  • Given the lack of new supply for at least 3 more years and the new infrastructure coming online, they remain optimistic
  • Hope to start with pilings on Site 3 in November
  • SCC early performance statistics: 
    • Hotel occupancy: 61% in April, 74% in May and 85% in June 
    • Holiday Inn is getting great reviews
    • Win per mass table per day is great
    • Win per slot/ETG is also great
  • LV:  they are renovating 1000 rooms. They are seeing a pick up in bookings for 2013.
  • Macau VIP segment represents about $500MM of their revenue and 25% of their EBITDA.  Feel like that Mass growth is the big opportunity for them.  Has a 45% margin vs. the 12-20% margin of VIP.
  • Singapore's VIP segment didn't grow last quarter but are confident in the future of that property
  • Prepaid $400MM of debt on the US bank facility and pre-paid the Macau ferry financing.  $9.374BN of debt at 6/30 at 3%. Have no sizeable maturities until 2014.
  • Net Debt/EBITDA: 1.5x
  • Cash: $3,529.6MM
  • Expect to spend $500MM at SCC in 2H12 and $500MM thereafter
  • $350MM of maintenance capex in 2012 and $500MM for FY2012. Expect a similar amount for 2013.



  • Will have 1,000 Mass tables when SCC is fully open and 9,000 rooms.  Visitation may be slowing but the better customers keep on coming. They do believe that VIP will continue to grow.  Have an ability to go to ETG's and slots, especially with higher table minimums at competitors' properteis. Have 7,000 slot and ETG positions.
  • Use of cash: they are considering all of the possibilities
  • Receivables overview:  Think that they are in good shape in MBS.  Since inception, they've had $10.4BN of credit extended.  Collected 91% of credit extended.  Have another 1.9% of the total credit drop in reserve and 29% of receivables reserved.  From a Macau perspective, the growth in receivables is more from junket accounts.  $680MM of receivable over $510MM is related to junkets. They continue to collect from junkets without issue.
  • Expect that they will get 400 new tables from the government by the time they open the last 2,000 rooms in January. There will be some table movement though at September 20th when they open Ph2 since they won't have all of the additional 400 tables. 
  • Their margin is impacted by the mix of VIP play, since Mass takes a while to build at SCC.  The properties are also less efficient when a property opens. Once the property is fully opened, it should have the best margins in the group. 
  • They are not seeing any heightened competition on the VIP side in Macau.  Wouldn't be surprised if people get more aggressive on the slot/ETG side.
  • What is the credit appetite in Macau?  They haven't seen a big change in credit pull back but rather a pullback in customer demand.
  • Any seasonality issues in Singapore?  It's a very chunky market and the play is less seasonable. Its just driven by a few very large players and highly concentrated.
  • There is no indication that the gaming habits of Asian players is going to change
  • Connecting SCC and Venetian through a walkway will be very impactful when its opened by year end
  • There is no reason why SCC won't have great margins.  The real upside is on the Mass side for this property.
  • Only half of the non-gaming amenities at SCC are open at this point. On September 20th, they will open a lot more of the amenities.
  • If they can earn the type of mass win per table at SCC that they have at Venetian and FS that's another $1.4BN and at a 45% margin that would solve their own problems.
  • They have another piece of land called "The Tropical Garden" where they want to develop into 500-800k of shopping mall there which they plan to connect with a covered walkway. They also have more space to add more hotel towers at Venetian.
  • They still don't have a handle on seasonality in Singapore. On the VIP side, they don't have a sense for seasonality.
  • Market share for MBS - Sheldon thinks that share has been moving up. They just have a better property.
  • At these prices, Sheldon would like to buy back more stock.  All the other shareholders want dividends so they will likely do more of that in the future.
  • Comment on the process of Singaporeans to further restrict local visitation to casinos. The government wants to protect the vulnerable people in society against getting into gambling debt.  LVS doesn't think it's an issue if the government restricts visitation from people who can't afford to gamble in the first place. Think that the mass market can continue to grow even with more restrictions.  25% of their visitors are Singaporeans. 
  • They had the extra $29MM charge in MBS because they thought that some of the receivables won't be collected. It's not reflective of a change in their reserve policy.   
  • Unfortunately, Singapore is much more dependent on a small number of high rollers and their visitation is not that predictable. They will try to host more events for their VIPs to come more often. 



  • Macau EBITDA: $429MM vs. consensus of $492MM
    • Region wide stats:
      • RC volume: +36.3%  YoY
      • Non-rolling drop: +20.9% YoY
      • Slot handle: +72.5% YoY
    • Our overall market share of gross gaming revenue in Macao also increased to 17.7% frpm 16.0% in 2Q11
    • Venetian net revenue and EBITDA of $649MM and $229MM, respectively
      • RC hold of 2.68%
    • FS net revenue of $266MM and EBITDA of $76.6MM
      • RC hold of 3.05%
    • SCC EBITDA of $52MM on net revenue of $266MM
      • RC hold of 3.12%
    • Sands net revenue of $272MM and EBITDA of $71MM
      • RC hold of 2.58%
  • MBS EBITDA: $330MM vs. consensus of $419MM
    • "Marina Bay Sands in Singapore delivered a steady financial performance, including good growth in its hotel and retail segments, although lower rolling volume, low hold on rolling table games play and higher provisions for accounts receivable negatively impacted our results this quarter"
    • RC drop:  -5.9%
    • Mass drop: +8.2%
    • Slot handle: +15.1%
  • LV EBITDA: $64MM vs. consensus of $95MM
    • Hold was lower this quarter compared to the quarter last year, which negatively impacted our results. Baccarat play was up, but other table games play was down, reflecting overall market conditions in Las Vegas. Slot handle was up 8.2%.
  • Bethlehem EBITDA: $27MM vs. consensus of $26MM



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:  Even on a hold adjusted basis EBITDA fell short of our expectations and the Street.  Moreover, we already had factored in low hold in Macau and Las Vegas. 





  • WORSE:  visitation has slowed.  There will be more aggressive promotional activity in Mass/ETGs segments.  VIP customer demand continues to soften.
  • PREVIOUSLY:  The infrastructure of Macau continues to build, continues to get better and of course, we're dependent on the Chinese economic condition, which we feel is we'll have some level of softness from time to time, but overall is very well positioned for the future. I think over the next five years, you should be talking somewhere between 10% and 15% growth a year.”


  • SAME:  premium mass continues to ramp up
  • PREVIOUSLY:  I don't think on a mass market basis we've seen anything negative whatsoever. 


  • SAME:  management still believes they will add 200 mass tables and 1,200 slots in Phase IIA.  LVS is confident that by mid-January, SCC will have 400 additional tables.
  • PREVIOUSLY:  "“We're still getting requests for more VIP rooms in site 6, which we've allocated capital for to build and if we're not under construction now, we're all designed and ready to go to add an additional 60 to 70 tables in VIP on site 6.  The government is committed to lenders to provide 400 tables. They gave us 200 tables for the opening the first of the two mass casinos. And they're going to give us, presumably, the second 200 tables when we go to open our second casino.”


  • SAME:  will have up to 2,500 Sheraton rooms by Sept 20 (Phase IIA).  Phase IIB will start in Oct 2012 and will feature ~1,500 Sheraton rooms
  • PREVIOUSLY:  "The Sheraton, 4,000 room-Sheraton, which is two phases, will be open fully complete by the end of January and will pen 1,850 rooms, by the end of this September.”


  • WORSE:   margins fell from 32.1% in Q1 2012 to 29.5% in Q2 2012.  Q2 2011 margins was 33%.
  • PREVIOUSLY:  “We're already managing our costs. I was looking at the numbers just a couple of weeks ago and our costs are way down right away. I mean, first of all a lot of our costs at the operating level are in the gaming area itself. They automatically reduce if you don't have the volumes, and from a cost management standpoint we run the highest margins in Macau by far, and our company is built now as a high-margin company.”





  • WORSE:  we estimate MBS GGR fell 20% QoQ and 8% YoY.   On the bright side, hotel occupancy rose to 99.1% and REVPAR gained 30%.
    • “We've gotten to maturity in less than two years. So from now on you're going to see gradual increases in the Singapore market mostly from the VIP scenario because our hotel is running at capacity now and has been for a year.”
    •  “We also have mass market help from the new MRT station, the cruise terminal that will open and...  the Botanical Gardens that will open I think this November."
    • “Marina Bay Sands has become a really a significant retail destination. We have over 300 stores there driving traffic as well. So I think you'll see moderate... but consistent growth."
    • “Our hotel's running in the high 90%s, it's sold out most of the time on 2,500 keys at a very high rate.  The room [to grow] is really in the casino.  I would expect a high single-digit growth there over the next number of years.”





  • SAME:  25% ‐ 35% of total developmental project costs to be funded with equity
  • PREVIOUSLY:  We'll go up to 30% to 35% equity in any property we do or any resort development we do. We will not go above that and we will go for development financing for the rest of that for the rest of those projects.”


  • SAME:  minimum of 20% return on total invested capital
  • PREVIOUSLY:  “20% is our hurdle. Don't forget, that's 20% cash on cash, it's a higher return on equity obviously."

HedgeyeRetail Visual: CRI Coincidence?

CRI pulled its disclosure on wholesale pricing trends this quarter for “competitive reasons.” We don’t buy it – It’s no coincidence that they’ve added opacity here just as they comp against last year’s price increases…


CRI remains one of our top shorts following this morning’s print where it showed early signs of tail weakness.


See our quick take and follow up reports for additional detail:


"CRI: First Chink in the Armor"


"CRI: 2Q Report Card"


HedgeyeRetail Visual: CRI Coincidence? - CRI COTD

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