But not as good as we thought as taxi/airport traffic were worse than expected



We had previously indicated that the Strip gaming revenues could be up double digits YoY due to easy hold comparisons, particularly on the slot side.  However, with airport traffic down 0.8% and taxi trips down 1.5%, lower volumes are likely to eat into that hold tailwind.  We now see YoY growth in the +4-7% range assuming normal hold.  December slot hold is always lower than normal as 12/31 revenues do not get counted by the Gaming Board.  So for our purposes, we are projecting a December normal of 6.2% slot hold versus a "normal" normal of 7.4%.


More importantly, we are expecting slot handle and table drop ex baccarat to fall YoY.  Baccarat volume and hold are always big wild cards so we pay less attention to those metrics on a month to month basis.  With volumes like these, the headline print should look better than underlying fundamentals.  Sorry folks, but Vegas (and most domestic markets) is not recovering and that's bad for MGM.



Trouble In Vegas

The domestic gaming market has serious issues it must address. Since April of 2012, our Gaming, Leisure and Lodging team has churned out research discussing the lack of recovery in Las Vegas and the regional markets. It essentially breaks down to two points: demographics and economic sensitivity.



Trouble In Vegas - casino1



In terms of demographics, the truth of the matter is that younger generations aren’t enticed by what slot machines have to offer. The shrinking baby boomer generation has amplified gaming revenues in the past and attempts to appeal to younger players have not worked. Young people like video games, not Deuces Wild and archaic technology with random outcomes. 



Trouble In Vegas - casino2



On the economic side of things, gaming has proved to be more sensitive to economic downturn than virtually all other consumer sectors. Higher taxes in 2013 will certainly not help the situation, nor macro tailwinds. Addtionally, there’s a lower percentage of people gambling, smaller casino budgets, first time visitors are at an all-time low, daily hours gambled are at an all-time low and the younger crowd is busy clubbing, not gambling. Vegas and regional casinos will need a full blown economic recovery and new ideas if they want a shot at recovery.


In preparation for PENN's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “From a management team, we've been very focused on margins. I think we've done probably as good a job as anybody as in terms of holding or improving our margins during tough economic times.”
  • “I think it's Fortress' interest to stay as high a percentage ownership as they can within PropCo and OpCo for that matter.”
  • "Rationale for moving Perryville into the TRS for spin: “Maryland was because it's helpful in terms of mitigating some opportunities or creating some opportunities for OpCo to potentially acquire an asset in Maryland.”
  • “We are effectively finished with the IRS. That doesn't mean that some facts and circumstances couldn't change that might require us to go back, and I have to say that for attorney's purposes, but for all intents and purposes relative to the IRS, we're finished. We just need to get our gaming approval and get some financing done to obviously accommodate the spin.”
  • “The most compelling argument here is that the REIT, our PropCo, should have access to a lower blended cost of capital, which means quite candidly it would be much easier to bridge the gap between sellers' prices in terms what they would like to receive and what we might be able to pay for an asset”


  • “We have over 200,000 accounts signed up in Toledo since we've opened and we're still very encouraged about the prospects as we move into 2013 there.”
  • “We're right now very pleased with the flowthrough coming out of Toledo and expect similar kind of results in Columbus as that property now is – today is day 10. The early results in Columbus are very much in-line with what we would expect in a market of that size.”
  • “The promotional environment is very, very stable in the Charles Town / Maryland live battleground”
  • “I characterize our businesses that have not been impacted by new supply as generally flat. We're seeing visitation trends year-over-year flat and spend per visit generally flat in markets that are stable. Really not seeing anything different than what we saw in the second quarter.”
  • 2013 outlook: “I think the initial feedback is most people seem to think that we're in a pretty stable environment, nobody is projecting or feels comfortable that we're going to get a hockey-stick recovery, nor do they feel like we're going to see any kind of significant downturn… Our thinking too, as we go into the fourth quarter and into next year that the promotional environment is going to be – going to remain stable”
  • ‘We have seen erosion of business from the Columbus and Dayton markets into Lawrenceburg, certainly that will continue as we now have opened in Columbus... Clearly we're doing a lot of things to reduce our cost structure in Lawrenceburg to maintain our margins as best we can and I think our efforts from that team there have been working, even though we are seeing the loss of visitation from those feeder markets that previously only had Lawrenceburg as a gaming option.”
  • Q: “Is the Marlyand lobbying expense projection in your EBITDA guidance for the balance of this year”
    • A: “No, the amounts that we're spending in Maryland are decisions made on the day-to-day basis as the tactics of the campaign unfold. And so, therefore, what we are not doing is trying to project exactly how much we're going to spend, nor do we want to forecast how much we're going to spend for obvious strategic reasons”
    • “Just to be clear on the $20 million lobbying that is in your current guidance, but the $11 million October to-date and whatever you go above that is not in the guidance? Correct.”
  • “Toledo is doing a little bit better than we thought and I think Charles Town is doing a little bit better than we thought and then there's some offsets to both of those in different markets across the United States. Clearly, the Gulf Coast area is a bit challenging, and clearly not exactly as healthy as we would hope, but those are relatively small properties.”
  • “Next spring when Horseshoe Cincinnati opens, I think it's going to be another inflection point where we're going to see another set of new business volumes that are going to cause us to react accordingly as well. So, I think there's a lot left for us to do in Lawrenceburg”
  • “I would generally say, so far so good, slightly less than we expected, but there's a lot more that has to evolve before we can make any conclusions on what our new business volumes will be at our Hollywood Baton Rouge property”
  • “We have been up looking at a number of different markets in the Province of Ontario and we are active in discussions with local governments and also the province themselves about, certain markets there. I think, there's no question that what they want to do is resolve the direction they want to head in Toronto before they do anything with the operations that are affected by the Toronto decision. So, most of what we've looked at to-date have been markets that have no effect on a Toronto decision. We don't see ourselves competing for Toronto because of the level of capital investment required”
  • “Right now our focus is in building our coalition, which includes business leaders in several key areas across Texas to continue that mantra of letting them put it out to the ballot. We think going in that the position should be for gaming where the footprint of gaming already exists, which is at the racetracks. And so, this may take various forms as we get through the legislative process, but first focus, let the people decide and then we'll get a little bit more specific in terms of the actual legislative vehicle as we get closer to the session.”
  • Ohio racetracks:  “We are waiting for the approvals from the lottery and racing commissions to relocate our tracks. We need to get that before we get this started, hopefully, that'll occur before the end of the year. We hope to break ground end of the year, early 2013, and we're talking about a first half of 2014 opening, if all goes well right now”
  • “We continue to show improved margins at the M, given a very flat revenue environment there. And I don't think as we look into 2013, that's not going to change it all. We don't see any kind of robust recovery in Las Vegas right now. Construction continues to move very slowly there. The general economic conditions for 2013, I think are going to be very similar to what we saw in 2011 and 2012.”

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GDP -0.1% in Q4

Takeaway: The advance GDP estimate for 4Q12 printed at -0.1% - the first negative growth quarter since 2Q09.


Looking across the C + I + G + (E-I) componentry, the callout contrast is the strength between consumption and the weakness across the balance of the other constituents.  Personal consumption, which accounts for north of 70% of total GDP, accelerated sequentially for a net positive impact of 1.52% to real GDP.  The negative outlier was Government Consumption and Gross Investment which went from an outsized positive impact in 3Q12 ahead of the election (+.75% impact, highest since 3Q09) to a material drag, contributing a -1.33% impact to net GDP.


Net-net consumption accelerated, Investment and Net Exports moved to flat from an impact perspective and Government Consumption and Gross Investment served as an outsized drag on the quarter.  All-in, the negative headline print probably belies a more benign reality.  Housing continues to recover, employment trends remain positive, and the high frequency consumer data remains stable-to-better. 


Given these realities, does the market look through a rear-view 4Q GDP number and the negative influence of a government consumption component negatively impacted by odd comp dynamics?  More than likely. As such, we are sticking with our forward looking view that growth is stabilizing, which is validated by the strength in consumer consumption.


As Keith highlighted this morning, from a tactical investment perspective, domestic and global equities are moving to overbought and treasuries oversold, suggesting a near-term opportunity to book some gains and tighten up gross and net exposure a bit.  The current risk range for the S&P500 = 1


Ping us at if you want to dig deeper into this report.



GDP -0.1% in Q4 - GDP Component Contribution


GDP -0.1% in Q4 - GDP Componenet   Chg




With the inclusion of today’s GDP report, which came in in-line with our expectations for a trip to Quad #3 in 4Q (see chart below), our updated estimate range for 1Q is +1.8-2% YoY and +2-2.3% for full-year 2013.  The slightly lower handoff figure (i.e. 4Q reading) in the algorithm reduced these estimate ranges from +1.9-2.6% YoY and +2.3-2.6%, respectively.


What would get us to walk our estimates down from here (i.e. shift our expectations to the low end of our US growth risk range) would be a continued breakout in energy prices from current levels and a breakdown in the DXY through its 78.11 TAIL line of support. For now, however, an expanding yield spread (+29bps over the past month) augments our call for a move to Quad #1 here in 1Q13 and likely in 2Q13 as well. Expectations around this marginal economic delta should continue to bode well for domestic equities with respect to the intermediate term.





Christian B. Drake

Senior Analyst 


Darius Dale

Senior Analyst




Feeling Fresh

Client Talking Points

Flying High

Fresh new year-to-date highs in the S&P 500 and Russell 2000 from yesterday’s close? You betcha. Same goes for Japan and China, too. You have to keep in mind that #GrowthStabilizing is part of the global macroeconomic picture; it’s not just the United States that reaps the benefits of a bull market. What’s important is that you don’t get caught up in the frenzy and lose sight of your goals and the amount of risk you’re comfortable with. Our models tell us the following is happening:


  • US Stocks (SP500) immediate-term TRADE overbought in the 1510-1513 range
  • US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  • US Dollar Index immediate-term TRADE oversold at $79.41
  • US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%


Guess what? China and Japan are overbought, too. Same goes for the Euro and the DAX. Markets go up and until they don’t and with Brent Crude oil approaching $115 a barrel very quickly, that kind of problem can cause growth to slow, causing consumption to slow. See where we’re going here? Still, any market bears are in for a rude awakening if they stick to their plan to short everything and not take advantage of the rallies. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“So I guess New Jersey is responsible for 2% plus in GDP. That's a lot of tomatoes.” -@ThemisSal


“The world is full of willing people, some willing to work, the rest willing to let them.” -Robert Frost


Jan. ADP Employment Report: Prior 215k, Market Expects 175k , Actual 192k

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 80.46%
  • SHORT SIGNALS 78.35%