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Sucker Economics

“Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth…”

-Louis Bacon


What do Louis Bacon, Stan Druckenmiller, and George Soros all have in common? They’re some of the best players in this Global Macro game, and they’re all either giving money back to their investors or getting out of the game completely.


They think these central planners are right nuts. So do I. But does the manic media that perpetuates this entire gong show get that? Have these pundits ever traded a macro market in their life? Or, like the worst players at a poker table, are they just the suckers trying to remain relevant until their ratings and/or credibility goes to zero % too?


As the old saying goes, look around the poker table; if you can’t see who the sucker is, you’re probably it.


Back to the Global Macro Grind


We got longer yesterday (cutting our Cash position to 58%) but it was still a clean cut example of what Louis Bacon coined in a recent letter (explaining why he is giving back $2B to his investors) as Disaster Economics: “where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets.”


Don’t think this is turning into a Q308 like disaster? Ok. What would you call this?


1.   745AM EST (yesterday), Spanish stocks rip to the upside, +2% on the day, after the ECB decides not to cut rates, but plenty of print, tv, and radio pundits proclaim their faith that “it’s at 830AM that we get the good stuff.”


2.   835AM EST (yesterday), Spanish stock stop going up, and fast, as pundits comb the release looking for “hints” that the ECB really is going to deliver the drugs, like Bernanke was supposed to in the day prior.


3.   1130AM EST (yesterday), Spanish stocks close down -5.2% on the day, a 7% (not a typo) intraday reversal. Pundits feel shame.


Or do they? 430AM EST, I get up this morning and “European stocks rally” on new news that Spain (as in the country) is going to hold a press conference about something.


I couldn’t make this up if I tried.


Notwithstanding the simple math of the matter (a market that loses 7% of its value needs to “rally” +7.5% to get whoever got suckered in at 830AM EST yesterday back to break-even), I’d say Bacon is on to something here.


Then you have the other running narrative of people who are in the business of markets going up saying “but the SP500 is up 10% for the year-to-date.” That one is just a beauty – it’s as if people think about their life-long net wealth on the same calendar as Old Wall Street’s bonus season.


Just to get the record straight – and I mean how real people with real money think about the return of their moneys:

  1. SP500 is not +10% YTD anyway, it’s up +8.5%
  2. SP500 is down -3.8% from Q1 2012 (when #GrowthSlowing started)
  3. SP500 is down -12.8% from its 2007 high, where almost everyone of the Q1 2012 bulls were the same people

So, lucky you – you only have to be up +4% and +15% to get back to your 2012 and 2007 break-evens. This better be one heck of a US Employment Report this morning.


Better yet, if you’ve noticed this other little thing called a broad leading indicator (the Russell 2000 has led the SP500 the entire way):

  1. RUSSELL2000 is only up +3.6% YTD
  2. RUSSELL2000 is down -9.1% from its 2012 Perma-Bull high (March 26th, where the VIX bottomed at 14.26)
  3. RUSSELL2000 is down -6.1% in the last month alone

I know, I know. Don’t be spinning that storyline on us KM, we’re still living large over here on the everything fine front. Until you aren’t. What’s happened this year at MF Global, JP Morgan, and Knight Capital is an obvious reminder of Disaster Economics too.


As returns (both buy and sell-side) get tougher to concoct, we’ve created a culture on Old Wall Street of cheating and corner cutting so that people A) don’t get ridiculed by their peers internally and/or B) get paid.


That pressure is cultural.  It’s also called causality. Much like central planning policies to suspend economic gravity, it’s only sustainable until it goes away.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $105.09-107.32, $82.95-84.11, $1.20-1.23, 5811-6649, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Sucker Economics - Chart of the Day


Sucker Economics - Virtual Portfolio


Despite at least 4 sell-side downward revisions in July, we still have MGM missing the quarter by a wide margin


The Vegas recovery is very much hanging in the balance and that’s not good news for this Strip-centric company.  May on the Strip was a disaster and we think June will likely prove to be down YoY as well (see our 7/10 and 7/31 notes).  LVS and WYNN already punted in Q2 at their respective LV properties.  The only question will be how much of this has already been anticipated by the buy side.  Considering how much the stock is down - 34% since their last earnings report – the whisper may already be at our level.


We are more concerned about estimates going forward.  The Street looks too high for 2012 and 2013.  We are currently 13% below the Street in EBITDA for both Q3 and Q4 2012 and 14% below for 2013.  Our below Street numbers are predicated on our cautious macro outlook, way too aggressive Street growth estimates, inflationary cost pressures, and the unfavorable demographic picture we’ve highlighted over the past two months:



MGM will report Q2 earnings on August 7th.  We estimate $2.3BN of net revenue and $517MM of consolidated property level EBITDA.  We also look at wholly owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate expense which produces EBITDA of $417MM.  Our net revenue estimate is 1% below while our comparable EBITDA is 8% below consensus.





We project MGM’s Strip properties to produce net revenue of $1,236MM and EBITDA of $287MM, 2% and 3% below Street numbers, respectively.  We average RevPAR growth of 3%, low single digit casino and other growth and low single digit operating expense increases.

  • Bellagio:  $285MM of net revenue and $76MM of EBITDA, 2% and 7% below consensus, respectively
    • 4% increase in RevPAR
    • 2% growth in casino & other
    • 4% expense growth
  • MGM Grand:  $241MM of net revenue and $37MM of EBITDA, 2% and 12% below consensus, respectively
    • 5% increase in RevPAR
    • 4% growth in casino & other
    • Flat YoY expense
  • Mandalay Bay:  $213MM of net revenue and $56MM of EBITDA, 1% below and 4% above consensus, respectively
    • 4% increase in RevPAR
    • 1% growth in casino & other
    • Flat YoY expense
  • Mirage:  $150MM of net revenue and $29MM of EBITDA, in-line and 3% above consensus, respectively
    • 3% increase in RevPAR
    • 4% increase in casino & other
    • 1% increase in expenses

Other US

  • MGM Grand net revenue of $142MM and EBITDA of $38MM, 3% and 12% below consensus, respectively
  • Mississippi net revenue of $128MM and EBITDA of $27MM, 1% below and 4% above consensus, respectively

MGM Macau should report $690MM of net revenue and $164MM of EBITDA (the street is at $687MM and $166MM, respectively.)  Our assumptions in HK$MM’s are as follows:

  • Net casino revenue of $5.3BN and total revenue of $5.4BN
    • Net VIP win of $3.4BN
      • VIP Turnover: 159,170 assuming 7% direct play
      • Hold of 3.29%
      • Rebate rate of 35% or 1.15%
    • Mass table win of $1,375MM
    • Slot win of $560MM
  • Variable expenses of $3,253MM
    • $2,827MM of taxes and gaming premiums
    • $395MM of commissions to junkets
  • Fixed expenses of $830MM
  • $95MM of branding fees

We estimate that City Center will report $35MM of EBITDA on $256MM of net revenues

  • Aria:  $204MM of net revenue and $24MM of EBITDA
  • Mandarin Oriental:  $13MM of revenue and $1MM of EBITDA
  • Crystals:  $13MM of revenue and $7MM of EBITDA
  • Vdara:  $22MM  of revenue and $6MM of EBITDA
  • $3MM of development and administrative expenses

Other stuff:

  • D&A:  $235MM
  • Corporate & other:  $38MM
  • Stock comp:  $9MM
  • Net interest expense:  $284MM
  • Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($36MM)
  • $33MM of tax credits
  • Minority interest of $63MM

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Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap

PCAR vs. NAV: Navistar Doesn’t Look Cheap


  • Adjusted EV:  Below, we update our table comparing Navistar and Paccar on an adjusted EV/EBITDA basis (2013 Consensus) and again find that Navistar is actually more expensive than Paccar.  While we generally do not rely on multiples for valuation, the comparison is telling.
  • Operational Risks:  Navistar has numerous operating and management challenges ahead that will bring tremendous operating risks.  Why pay more for Navistar than Paccar? 
  • Downside Risk Significant:  If Navistar cannot pull off a rapid and challenging switch in engine emissions technology, the shares could easily end up in the single digits.  That still doesn’t seem like a risk worth taking to us, even with the shares down 43.4% YTD.



Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap - pcar vs nav



UPCOMING EVENT:  We will be hosting a call on our Truck OEM Industry Black Book on August 16th at 11am. Details to follow.



Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap - perf 8212


Canada and IL moving faster than expected



Maybe the only positive takeaways from IGT’s earnings call were that replacements were a lot better than we expected and Illinois units should start shipping in the September quarter.  Canada was the big boost to IGT’s replacement tally and the news there looks even better.  We’ve done some research and it looks like both markets may be moving faster and generating greater sales over the next 1 to 2 years than expected by the Street.



Driving IGT’s strong replacements was the beginning of the once-in-a-decade tailwind where Canadian provinces overhaul their systems and undergo a massive replacement cycle.  IGT shipped 900 units to Loto-Quebec in the June quarter.  Next quarter, IGT may ship 3,000 units to Loto-Quebec and Atlantic Lottery Corporation.  IGT isn’t the only manufacturer gearing up their plants for Canadian shipments; BYI and WMS may ship in the September quarter to the Atlantic Lottery and Alberta, respectively.    


A further boost could come from the Western Canadian Lottery Corporation (representing the provinces of Saskatchewan and Manitoba) who may be awarding between 10-11k replacement units soon after finalizing some details.  We estimate that over the next 2 years, an additional 28k replacement units should be shipped to Canadian provinces.  This may be more than the Street is expecting.



In IL, there are currently 88 locations that are approved for VLTs, with a maximum of 5 machines per location.  The Illinois Gaming Board meets each month to approve additional locations.  Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines, charging them with Felony action.  We therefore expect an acceleration of approvals for legal machines in the coming months.  Our understanding is that ASPs will be in the mid $12k range and that many suppliers will offer financing to route operators. 


Into Illinois, IGT will distribute its units exclusively through ABS; WMS will use Betsson as their distributor; while BYI is planning on selling directly to route operators.   We understand that IGT has a slug of units on order while BYI also has “some” units on order.  We believe WMS do not have any orders yet.


We expect about 1,000 units to be shipped to IL in the September quarter, with IGT recognizing the majority of those units.  In total, we think that there should be about 3,000 units shipped to IL in 2H2012 and over 10,000 units in 2013.  In terms of backlog, we think that distributors have already put in orders for 5,000 slots, of which 1,500 went to IGT.  BYI and ALL garnered about 10% share, while WMS was left behind given their high product pricing.  While there are still a few obstacles for the route market to begin operations, it looks like we could be seeing at about 10,000 units go to IL over the next 12 months and potentially much more than that over the next 2 years.  Again, we think those numbers may exceed Street expectations.


In-line quarters are not good enough


  • For the stocks we monitor in gaming, lodging, and leisure, it’s been a rough and volatile earnings season where stocks were punished even though sentiment was low and stock prices down into the earnings releases
  • So far, the 8 companies that missed and/or lowered guidance were down an average of 6.4% more than the S&P on the first day of trading subsequent to the announcement
  • The five companies that beat were only up 3.7% more than the S&P and even the in-liners fell 3.4%



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