MGM: Shorting The Slump

Make no mistake about it: The Las Vegas economy remains depressed and the majority of gaming profits made these days are outside of the Strip in places like Macau. Slot volumes have declined for five consecutive months and will likely continue through the first quarter of 2013. Skewing the odds in the casino’s favor as a “price increase” isn’t a sustainable method of fixing the problem.


The main problem with slots lies in the demographics of gamers. Younger people aren’t interested in playing slots when there’s Blackjack and Hold ‘Em to be played. The average casino visitor continue to rise, with 65+ year olds rising to 35% of the visitors. Baby boomers are dying out.



MGM: Shorting The Slump  - MGM normal



MGM Resorts (MGM) is highly levered to Vegas whereas other companies focus more on Macau. Thus we are negative on the long-term fundamentals of domestic gaming. We see earnings risk on the near-term duration for MGM and the stock is below our TREND line of resistance from a quantitative perspective.

Citigroup: Pandit Vs The Market

Citigroup (C) used to be a triple-digit stock if you can remember a time before the financial crisis. There was the 1:10 split back in 2011 of course, but the bank’s stock has essentially been destroyed during the tenure of Vikram Pandit, who resigned as CEO this morning. 


As you can see below, the stock fell -89% between December 2007 when he first became CEO and today. Shareholders will most likely welcome a change in the ranks with that kind of performance haunting them. Meanwhile, The S&P500 has almost returned to its original December 2007 levels, down only -2.1% for the same time period.


Citigroup: Pandit Vs The Market - image001

It Doesn't Add Up







After the first presidential debate, the government released three economic data reports that suggested growth was returning to the US. Advanced monthly retail sales, Jobless Claims and the Jobs Report that Jack Welch got in a stir on Twitter about all seem suspect. The Jobless Claims report was missing one “large state’s” data and the Jobs Report suggested unemployment was at 7.8%? Get real. These kind of numbers don’t just magically appear overnight unless someone is tooling with them in order to achieve specific results. 




Now, if the above shenanigans occurred over the first presidential debate, we can’t wait to see what happens after tonight’s second debate between Obama and Romney. Economic growth is likely to be the key topic between both parties. Considering how close Romney and Obama are in the polls, this is going to be another round that Romney needs to win. If he can repeat the performance of his first debate, Obama will likely go back to spinning the data any which way he can to save face.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“‘We need a lasting solution’ -- Germ fin min Schaeuble, calling for creation of an EU ‘currency commissioner’ $$” -@carlquintanilla




“Cynicism is an unpleasant way of saying the truth.” -Lillian Hellman




Coca-Cola’s (KO) China business slows in quarter. Volume growth slows to 2% in China for Q3, vs. 6% year to date.




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To Growth

“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

-Ronald Reagan


Former Hedgeye Intern Brennan Turner recently started a company called FarmLead.  He has an ambitious goal which is to create the largest online grain trading platform in the recently deregulated Canadian wheat market.  Every day Turner sends out a morning recap of the action in the global grain markets from his office in the north Canadian outpost of Saskatoon.  Like a true entrepreneur he is focused on growth, and so ends each morning commentary with the salutation: “To growth”.


In recent weeks, we’ve had some government economic data reported in the United States that has suggested growth may be on its way back.  I’m not a conspiracy theorist, but under closer examination the data is probably more suspect than reliable.  The specific examples I’m thinking of include:

  • Advanced monthly retail sales – According to preliminary estimates, retail sales were up +5.4% for the month.  This is meaningfully above the 20-year average and an acceleration over the prior month.  The caveat is that this is a seasonally adjusted number.  In fact, the seasonal adjustment was $22 billion.  For comparison, the seasonal adjustment in 2012 was $12 billion.  So the biggest growth component of retail sales was the Commerce Department’s seasonal adjustment which was up a staggering 83% year-over-year.
  • Jobless claims – Last week jobless claims appeared to show meaningful improvement and fell 28,000 to 339,000.  At face value, this is a meaningful week-over-week improvement.  The caveat of this number was of course that one “large” state was excluded, which diminishes the improvement.
  • Jobs report – Jack Welch probably made the most noise around the jobs report two weeks ago when he tweeted, “Unbelievable jobs numbers … these Chicago guys will do anything … can’t debate so change numbers.”  The reality of the jobs report is that the headline number of 7.8% was a misleading statistic, although it likely wasn’t conjured up in the Obama campaign office.  The key reason that the unemployment rate is dropping is because labor force participation is literally at 20-year low of 64%.

Not surprisingly there was some furor over Welch’s tweet and as a result he wrote an op-ed in the Wall Street Journal the next day clarifying his statement.  A point that is worth highlighting from his op-ed is the following:


“Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.”


Similar to the retail sales numbers, the seasonality reported in the jobs numbers this year appears to be seeing an accelerated adjustment.  Once again, this isn’t a conspiracy theory statement, but rather a red flag as it relates to reading too much into some of the recently reported U.S. economic data.  Unlike one of our competitors who took up their Q3 GDP estimate yesterday on the back of growth in seasonality adjustments, we are not there yet.


Tonight we are likely to get a lot of discussion about future economic growth in the United States as President Obama meets Governor Romney tonight for the second Presidential debate.   The lead in quote from Ronald Reagan was not an attempt at a political statement, but rather an allusion to tonight in which it is likely both candidates refer to predecessors that they hope to emulate to stimulate growth.


According to the average of the most recent six major national polls, this race is basically a dead heat at 47.3 to 47.3.  Some of the polls, like the most recent Washington Post Poll that has Obama up three points, still appear to have some Democratic skew (Democratic ID of 35% versus Republican ID of 26%), but in general this race is definitely in the category of too close to call.  Tonight, Obama has a chance to re-establish himself, but even so the damage is likely done from the first debate and we will likely stay tight into election-day.


As is typical for modern Presidential politics, this race is once again going to come down to the battleground states.  On this front, we will be joined next week on October 24th by Professor Ken Bickers from the University of Colorado, who has done a historical analysis of state-by-state economic indicators as a method of predicting Electoral College results.  His work has predicted every Presidential election accurately since 1980.  The dial-in will be circulated to our Macro clients in advance, but if you aren’t a macro client and are interested in gaining access to this call please email .


Flipping to Europe briefly, Spain has obviously been in the news over the last couple days.  It appears that the Spaniards will be requesting some form of aid, which is increasingly likely to be a credit line as opposed to a full blown bailout.  The Spanish 10-year, while still below 6.0%, did accelerate over night from 5.72% to 5.83%.  As always, though, the root of Europe’s issues are in expectations as much as anything and as it relates to potential Spanish intervention an unnamed Spanish Finance Ministry official said the following:


“He suggested that the day following a request, interest rates on Spanish debt could fall by 150 bps, while the Spanish stock market could surge 15%.”


We’d probably take the other side of that.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.67-116.29, $79.24-80.06, $1.28-1.30, 1.64-1.72%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


To Growth - Chart of the Day


To Growth - Virtual Portfolio


Takeaway: LVS could generate significantly more revenues if it could match the market average VIP revenue per table

  • Despite the big VIP push starting last year, LVS trails the market average in table productivity by a wide margin
  • Mass revenue per table is also below the market average but only by a small margin
  • Assuming market average revenue per table, LVS could be generating approximately $200 million more in EBITDA annually.  We expect the company to continue to improve its productivity in Mass and especially VIP throughout 2013.



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