Four Percent

This note was originally published at 8am on July 25, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”

-Benjamin Franklin


Last night I attended a launch party for the first book to be released from the Bush Institute, which is the non-for-profit that President George W. Bush started after leaving office.  The launch was held at the Canadian Consulate in Manhattan, so I felt right at home.  The book, for those of you who haven’t read the news clippings, is called, “The 4% Solution: How Can America Regain Its Economic Strength?”


In the Chart of the Day, we show real year-over-year GDP growth going back to 1945.  The moral of the story is that four percent GDP growth is no small task.  Since World War II, the average year-over-year GDP growth in the U.S. has been right around 3%. Over the last decade, of course, it has been significantly lower.


In the forward to the book, the former President Bush makes no bones about the fact that growth began to slow under his tenure.  In fact, he writes:


“While the causes of the 2008 crisis will be debated by scholars for decades to come, we can all agree that excessive risk taking by financial institutions, irresponsible decisions by lenders and borrowers and market-distorting policies all played a role.  The question now is which policies should we adopt to fix the problems, speed the recovery, and lay the foundation for another long, steady recovery.”


Obviously, it is a worthy question, especially in the short term as we wake up to even more incremental data points that growth is and will slow both in the U.S. and globally.  Some of these include:


1.   Company specific reports – I’d like to include Apple in this since the company “disappointed” the consensus estimates of the Old Wall, but the reality is that Apple still sold 26 million iPhones (good for 28% year-over-year growth) and iPad sales grew more than 80% year-over-year.  In aggregate, though, corporate earnings, especially on the top line where it matters, have been validating a slowing global economy.


2.   European yields – Over the past couple of weeks, European sovereign debt yields in the periphery have gone to new highs.  Specifically, Spanish 10-year yields, even if marginally off their highs of the morning, are north of the 7.5% line.  The implication of this signal is that European governments need to do two things, both of which will slow growth in the short term, cut more spending and likely add more debt to their balance sheets to stay solvent.


3.   Consumer confidence – The global economy is driven by consumer spending.  The latest negative data point comes from South Korea.  This morning South Korean consumer confidence fell to the lowest level in five months.  Unless consumers globally have confidence, they won’t spend and economic growth will remain anemic.


Despite the global economic malaise that is being reinforced every morning, President Obama’s re-election chances remain relatively positive.  In fact, a NBC News / Wall Street Journal poll out this morning shows that President Obama holds a 10-point lead on the question: who would make a better Commander in Chief? At the same point four years ago, a Pew poll showed that McCain led Obama on the same question by 15 points.


This perspective is confirmed by our Hedgeye Election Indicator that shows Obama’s re-election chances are at 57%.  This corresponds with the Presidential predictive market at InTrade that shows a similar reading with Obama having a 57.3% re-election probability.  So, what does Romney have to do to narrow this race?  According to the partisan crowd last night, he has to move the discussion away from Bain Capital, focus entirely on the economy, and introduce a differentiated economic plan to get the U.S. economy back on a growth trajectory.


A consensus view of many of the economists last night, albeit they were more conservative leaning, is that economic policy will fail if it is thought of as a welfare policy.  On some level, it is hard not to disagree with this point.  While we harp on it daily, relying on government to be the solution is, in fact, the problem.  To wit, I received a morning note today from a friend that runs a large institutional trading firm.  His note led off by saying that European markets and U.S. futures are “holding on” in hopes of government / central bank action.  How sad is that?


I’ll answer my own question: it is very sad.  Nonetheless, we have to play the game in front of us.  So for those of you who are looking for a government related catalyst of one kind or another, there are few dates to keep in mind:

  1. Aug 1st – Federal Reserve meetings in the U.S.;
  2. Aug 23rd – 25th – The annual central bankers confab in Jackson Hole; and/or
  3. September 13th – Federal Reserve meets again.

You want catalysts? We got catalysts!


Unfortunately, government induced catalysts don’t do much for inducing real and sustainable growth, even if they do at times arrest economic gravity.  Although according to some recent analysis from our own Josh Steiner, even that point is questionable.


The most recent round of short selling bans in Europe made Josh look back at the last times governments intervened in the free markets to ban short selling.  On August 8th, 2011, France, Italy, Spain, and Belgium banned short selling.  The Euro Stoxx Bank Index went on to lose 21% over the next month.  Even more noteworthy was the SEC short selling ban on September 8th, 2008 of the financial sector, which led to subsequent 76% decline in financials over the next six months.


So, what’s my plan for growth? For the central banks and central planning governments to do one thing: stop.


Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1569-1599, $99.45-103.98, $83.36-84.17, $1.20-1.22, and 1329-1349,


Best of luck out there today,


Daryl G. Jones

Director of Research


Four Percent	 - Chart of the Day


Four Percent	 - Virtual Portfolio






  • Their margin achieved this quarter is a record for the company
  • Grand Lisboa:  Mass growth 25.5%; 35% growth in VIP revenue.  They are remodeling some space on level 9 & 10 to create more VIP capacity.
    • ADR:  HK$2131/ Occupancy: 93%
  • Cotai:  They are working at full speed on the project design



  • Oceanus performance:  1H results were encouraging overall and on a table basis. Volume increased 12.9% sequentially in 1Q but then decreased QoQ in the second Q due to a suspension of gaming tables
  • Grand Lisboa is capacity constrained on Mass
  • Luck in 2Q?  Held at 2.86% in1Q and 2.92% in 2Q at Grand Lisboa.
  • Chips in circulation increased by $500MM YoY, mainly due to the commissioning of new junkets buying into new chips
    • Increased VIP tables from 354 to 372
  • Competitive landscape?
    • Seeing pressure on the mass since they have limited room product so they are struggling to maintain their share
    • Their non-gaming margins are getting squeezed due to increased F&B costs
  • Policy is dividing out 50% of their profit 
  • Have a limited physical capacity to add mass tables on the main gaming floor. They are taking 40 tables from 3rd party operators and 200 staff members into Grand Lisboa.  They already reduced the number of slots to make room for more mass tables. Will see that they can get more cash from their VIP tables. 
  • Third party agreements have thresholds that they need to meet and that will give them an opportunity to take back some tables. It's not a hard and fast rule though. Their relationships are deeper than that.



(note that all $ figures are in HK$ for the 6M ended June 30, unless otherwise noted) 

  • 2Q12 results: 
    • Gaming revenue: $19.3BN, -1% YoY
    • Adjusted EBITDA: $1.9BN, +5% YoY
  • Total Group revenue of $39.3BN (+3% YoY) gaming revenue of $39BN (+4% YoY),  and Adjusted EBITDA of $3.8BN (+9% YoY)
    • Mass table revenues: +15% YoY to $11.7BN 
    • VIP revenues: -0.5% to $26.5BN
    • Slot revenue: +3.2% YoY to 769.2BN
  • Mass market table share: 32.4% and VIP table share of 27%
  • Casino Grand Lisboa Adjusted property EBITDA and profit grew by 22.2% and 22.5%, respectively
  • "618 VIP gaming tables in operation with 29 VIP promoters, as compared with 609 VIP gaming
    tables and 32 VIP promoters as at 31 December 2011."
  • Mass tables: 1,157 vs. 1,166 at Dec 12
  • "SJM had 3,769 slot machines, operating in 14 of SJM’s casinos and in three slot halls, as at
    30 June 2012 as compared with 3,910 slot machines as at 31 December 2011."
  • Cash: $22BN
  • Declared interim dividend of $0.10/share for the 6M ended 6/30/12



The trend could not be any more clear


  • In F4Q, WMS’s new unit sale revenues declined 11% YoY while total receivables increased 22%.  On a FY basis, new unit sale revenues fell 17% and total notes receivable increased 22%.
  • Over the last 3 years, new unit sale revenues have declined from $375MM to $334MM, or 11%.  At the same time, total notes receivable have climbed from $151MM to $325MM, or 116%.
  • Within the total notes receivable bucket, long-term receivables have been growing at an alarming rate from just $8MM at June '08 to $122MM in June '12.  Over the last 3 years, long-term receivables have increased more than three-fold.



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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:  While overall EBITDA was in-line with reduced expectations, business trends have certainly worsened since the Q1 conference call.  Q3 RevPAR looks like it will go negative.  However, the precipitous drop in the stock price had already incorporated the softness.  Management's comments about the environment improving post quarter end was surprising.  We'll see how it plays out.





  • LITTLE WORSE:  There was a patch of softness from May-June that led to drop off in in the year for the year convention bookings.  MGM's convention mix for 2012 is trending at about the 14-15% mix level (2011 mix was 14.7%) which is below where they wanted to be.  2013/2014 bookings have not been impacted, however.
  • PREVIOUSLY:  "We expect convention mix to increase YoY during 2Q [at least +1%], and most notably our convention pace is up significantly in 2013 and 2014.  We expect convention mix to be flat to slightly up year-on-year this year."


  • SAME:  LV REVPAR rose 5% YoY. 
  • PREVIOUSLY:  “Based on our current booking trends, we expect a mid single digit RevPAR growth in the second quarter."


  • WORSE:  3Q REVPAR will be down slightly with weakness in bookings in May/June.  It's too early to make a call on how 4Q will shake out 
  • PREVIOUSLY:  "We continue to believe that RevPAR growth for the year will be at least mid-single digit with potential upside coming from the in the year, for the year convention bookings and retail segment strength.  It's a combination of both, slightly more occupancy."


  • SAME: ~3,300 rooms have been completed to date, with the balance expected to be completed by September
  • PREVIOUSLY:  "Our MGM Grand room remodel program continues to progress nicely with roughly 2,300 rooms completed and that project is on budget and on time to be completed by September of this year."


  • BETTER:  Aria occupancy reached an all-time high of 92.7%; quarterly REVPAR also reached a record of $187.  Much of the hotel growth is occurring in the more profitable cash segment.  Convention business at Aria for 2013 remains robust.
  • PREVIOUSLY:  "Looking out for the next two quarters, room bookings [at Aria] are significantly outpacing last year. We expect occupancy in the second quarter to be the highest ever for ARIA driven by continued growth in convention business as our world-class convention space continues to gain traction in the marketplace. Convention business is also robust for 2013."


  • SAME: CityCenter 2Q margins came in at 25.2%
  • PREVIOUSLY:  [CityCenter margin] "You can expect the margin to be about 25%."




Certainly not as bad as the whisper. 'Improving consumer behavior recently' was surprising commentary.



"We continue to focus on maximizing profitability by managing costs, improving our customer relationships via M life and social media outlets such as myVEGAS, as well as exploring growth opportunities in key strategic regions across the U.S. and internationally."


- Jim Murren, MGM Resorts International Chairman and CEO




  • Observed a pocket of softness in the US consumer starting in May which was reflected in spend particularly in domestic table games, entertainment and in retail
  • Also experienced slower in the year for the year convention bookings.  Based on these trends, expected RevPAR in 3Q to be down slightly.
  • However, the pace for 2013 & 2014 convention bookings is still up and has not been impacted
  • They have recently seen a pick up in consumer behavior
  • They have grown their market share in tables and slots in LV, a reflection of the success of M Life
  • ASCA has a been a great partner so far and they look forward to growing their network
  • Morgans will remodel "theHotel" into a Delano 
  • Focused on customer acquisitions though social gaming
  • MGM is actively pursing some opportunities in Toronto, Western MA, and Cotai
  • MGM Grand had 67,000 room nights out of service in the quarter, which was more disruptive then they expected
  • Believe that they will be able to refinance some of their secured debt at lower rates in the near future
  • $102MM of capex ($18MM at MGM China)
  • $350MM expected capex in 2012
  • 3,300 rooms of MGM Grand rooms have already been renovated and the balance will be completed by September
  • Bellagio Spa Tower remodel starting in August and will be completed before year-end holidays at a cost of $40MM
  • 3Q guidance:
    • Stock comp: $9-10MM
    • D&A: $230-235MM
    • Interest expense: in-line with 2Q
  • CityCenter:
    • Aria's 92.7% occupancy. June was the highest occupancy month since opening. Growth in the hotel is occurring in a more profitable cash business. 
    • Casino table game drop was strong and slot revenues grew 12%. Poker revenues were at a record level
    • Early ticket sales to Zharkana have been positive and the show is set to open on Nov 1
    • Crystals: operating expenses decreases slightly. One new tenant opened April 18th and Pinkberry will open in August. They were 87% leased at June 30th.
  • MGM China:
    • Seeing some slowdown in Junket RC growth
    • Had their best in-house VIP performance the quarter with volume growing 17% YoY
    • Looking to introduce new games to players in the near future
    • Butterfly exhbiition increased property visitation by 8%.  Attracts 50,000 visitors per month. This had a positive impact on retail, F&B, and mass gaming. 
    • Working to complete their Level 2 expansion in early 4Q by adding 40 new VIP tables; will introduce new junkets
    • Will work on Mass floor renovation next year
    • Their dialogue with the Macau government on their Cotai project is proceeding. Submitted application for land prep work and working to have general contractor on board in 4Q
      • 500 tables, 2500 slots, 1600 rooms
      • $2.5BN spent over 36 months
  • Have a strong event calendar for balance of 2012
  • For 2013, they will have refreshed room product at MGM Grand and Bellagio, a new show at Aria, and new restaurant concepts
  • Expect the new terminal 3 in McCarran will drive international visitation to Vegas - especially from Europe



  • Pocket of softness seen from mid May to late June (so 5 weeks). Since that time they have seen the booking pace pick up and pricing power improve. Look at it like a blip on the screen. It did impact their bookings in 3Q. Therefore, they expect RevPAR to be down a little YoY in 3Q. However, this has not had any impact on their long-term bookings
  • The reason they are not down double digits in 3Q is because they have seen a pick up in leisure travel. They don't have a view on 4Q RevPAR yet. All they see is that consumer trends are better. Their convention mix will be down in the 3Q vs an all-time record last year. 
  • Their bookings pace is up for 2013 
  • Have seen spend increase in the mid-single digits at the high end properties. At the lower end of their properties is where they have seen more weakness.
  • Mirage held single digits in the quarter so that didn't help them
  • MGM Grand: Had low hold and couple with the room disruption it cost them about $13-15MM
    • 2Q had the second highest RevPOR in their history
    • Had a good quarter in non-gaming categories
    • Slot handle was up
    • Getting nice increases in ADR and mix is improving. Convention groups love the renovated product.
  • Convention booking - seeing double digit increases of rooms on the books for next year. Expect an increase in convention mix next year. They are north of 70% booked for their convention business in 2013, including Aria.  Feel even better about 2014.
  • Always pruning expenses, but there isn't much to cut. Their goal is to pull out $50MM of expenses per year through better technology usage, efficiency etc.
  • FTE's are flat YoY
  • How are rates trending on forward contracts? They are getting increases. Their challenge is getting that similar increase in leisure and FIT.  Expect mid-single digit increases.
  • The opening of Terminal 3 in McCarran opened in June so that should have helped visitation. Expect that to have a continued positive impact on visitation.  Expect a record number of visitation in 2012.
  • People in China are being more careful in their spending habits which they believe is a short term phenomenon
  • Their agreement with the Macau government is for an annual fee in lieu of a dividend tax.  Roughly about $3-4MM payment in the quarter that covered all the previous years and the extension is pending approval.
  • What % of rooms were out of service at MGM Grand? It's what they expected.  Claims that it didn't benefit RevPAR because they already run at 90% - sicne they lose money on the weekends because they sell out.
    • In 2Q, there were 63,000 rooms out of service or 2% of total rooms in their portfolio
  • Cotai:  Key issue is that they have provided the government with everything they need.  They have been taking the opportunity for being in a position of lining up construction readiness as they wait for the land.
  • During the soft patch, the competitive environment picked up.  Now things have moved back to normal.
  • Having down RevPAR in 3Q will be a mix of occupancy and rate.  Will yield the rooms for maximum cash flow.
  • Chinese high-end bacarrat segment: had the largest table drop in their history in 2Q
  • Receivables exposure in Macau: 
    • Receivables: HK$809MM.  Have reserved HK$200MM against that.
    • Slightly ahead of last year, less than 10% ahead on total receivables outstanding
    • The advances to the junkets is about 60% of their receivables. They liquidate that outstanding amount each month.
  • The build out of Level 2 is not at the expense of their Mass business. Want to be able to add high quality Tier 2 junket operators. So they are reconfiguring the floor to maximize their VIP yields. They have 427 tables. So they can add some double tables and move some single tables into private junket rooms.
  • Is their target of 15.5% convention mix still achievable? They did 14.7% last year and hope to do 15% this year. They are currently pacing in that 14-15% range. 
  • Where did the pocket of weakness hit hardest?
    • There was little impact on gambling but more impact on retail, F&B spend on the "core" properties
  • Sustainability of their margins in Macau?
    • Still think that mid-to upper 20's margins are achievable
  • Managed and Other pick up in the quarter:  benefited from a full quarter of the IP fee out of Macau. 
  • Borgata account: $160MM sits in the trust account
  • Dividends out of Macau will be a Board decision



  • "Casino revenue decreased 1% at the Company's wholly owned domestic resorts, while rooms revenue increased 3% with a 5% increase in REVPAR at the Company's Las Vegas Strip resorts. The overall table games hold percentage in the second quarter of 2012 was 17.7% compared to 18.2% for the prior year second quarter. Slots revenue was flat compared to the prior year quarter."
  • MGM China:  EBITDA of $187MM (including a $12MM branding expense) on net revenue of $709MM
    • Mass drop: +7% YoY
    • Slot Handle: +39% YoY
    • VIP RC: -6% YoY
    • VIP hold: 3.3%
  • CityCenter EBITDA: $71MM
    • Net revenue from resort operations of $282MM
    • Aria table hold: 24% vs 29.2% in 2Q11
      • "The estimated effect of the decrease in hold percentage compared to the prior year quarter for net revenue and Adjusted Property EBITDA was $16 million and $13 million, respectively"
    • Aria RevPAR: +3% YoY
  • 2Q had a "non-cash impairment charge of $85 million related to the Company's joint venture investment in Grand Victoria."
  • 2Q "income tax provision was affected by a valuation allowance for a portion of U.S. deferred tax assets and by a net tax benefit resulting from entering into an annual fee arrangement with the Macau government with respect to the complementary tax on dividend distributions of MGM Macau covering the years 2007 through 2011, including the dividend distributed in the first quarter of this year. All taxes previously accrued on MGM Macau dividends distributed in prior quarters were reversed and the cumulative agreed upon annual fee was recorded during the quarter."
  • Cash: $1.7BN ($658MM at MGM China)
  • Debt: $13.4BN ($1.3BN under the Sr Credit Facility and $553MM related to MGM China)
  • "We remain focused on improving our free cash flow and deleveraging our balance sheet. One way we expect to be able to do this is by lowering our cost of capital. We envision an environment in the near future where we will have the opportunity to refinance some of our long-term capital at progressively lower rates"

HCA: Heartwarming Gain

While the rest of the world zigged on HCA stock, Hedgeye zagged, and it paid off  as a winning trade. Here’s what happened.


HCA Holdings (HCA) took a hit on Monday, closing down -6.5% after a soon-to-be-released New York Times investigative article was announced by management. In a nutshell, the article highlighted concern over cardiovascular surgical procedures at HCA affiliate hospitals. Despite the hype, we bought the stock for the Hedgeye Virtual Portfolio on the red per  Hedgeye Health Care Sector Head Tom Tobin’s guidance.


That paid off for us today as we sold HCA into the +5% rally as the rest of the world wised up and realized Monday’s news was overblown. Below are Tom Tobin’s notes on HCA and why we are reiterating our long bias:


•        The New York Times published its article on HCA which was previewed on yesterday’s earnings release and conference call.

•         It reads reasonably well for HCA relative to the stock price which fell -9.1% intraday and closed down -6.5%.

•         Staying long represents thesis drift for us on HCA, as we had seen their lack of legal issues as a positive relative to our Physician Utilization Uptick theme.

•         The quarter saw continued fundamental outperformance relative to the Hospital Subgroup and continues to support the long case



HCA: Heartwarming Gain - HCA Levels 080612

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