Prime Time For Mortgages

New data shows that banks are easing their standards on prime residential mortgage loans. On balance, 4.6% of banks reported flat to lower standards on prime residential loans, up from 1.6% last quarter. This means that banks are willing to lend to more borrowers as they ease credit standards and that is a positive for the housing market, which is already in the midst of recovery. We are also starting to see subprime loans come back into the picture, albeit not fully yet.  



Prime Time For Mortgages - MORTGAGE1



On the demand side, borrowers are showing plenty of interest in mortgages. The first quarter of 2013 marked the sixth consecutive quarter of banks reporting quarter-over-quarter growth in prime residential mortgage demand. Naturally, much of this is refinancing demand.



Prime Time For Mortgages - MORTGAGE2


Takeaway: Long term looks favorable for MPEL but will have to overcome fears of a China junket crackdown

Strong quarter; beats the Street, but falls a little below our projections due to higher costs


“Our results in the fourth quarter of 2012 completes a stellar year for our Company, achieving record quarterly and full year EBITDA. Our flagship property, City of Dreams, continued to deliver impressive results, recording significant sequential and year-over-year improvements in operating fundamentals in the fourth quarter, particularly as it relates to the increasingly important premium mass segment."


- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment



  • Improvement in margin was driven by mass/vip mix
  • Table yields at CoD continue to outperform. Table optimization activities continue.
  • Expected to close the $825 million high-yield bond debt this month
  • The RC segment has begun to return to growth
  • Adjusted for poor hold, EBITDA would have been approximately $255MM 
  • Very pleased with the financing they obtained for both of their projects
  • Non operating guidance:
    • D&A: $90-95MM
    • Corporate: $20-22MM
    • Net interest: $38-40MM (mid-quarter issuance and refinancing of their bonds, excluding the 1x cost of the note repurchase)



  • The junket crackdown news came from a British Media outlet, so that should tell you something in and of itself. They have not heard or seen anything regarding a junket crackdown.
  • Thinks that their Mass tables are performing quite well compared to the market at CoD
  • Premium mass is really about product and services. It's a competitive segment but think that they have the best hotel inventory in Macau. In the last 3 quarters, their margins have remained stable in the premium mass segment.
  • CoD Ph3:  They are very advanced in terms of design.  They are waiting for the land to get re-gazetted since it was orginally meant to be an apartment hotel.
  • Think that the new Chinese administration is currently ramping up and the Chinese economy and market is improving YoY. Predicts at least 10-15% growth in Macau GGR market in 2013. 
  • Feels that the Chinese government continues to be very supportive of Macau, as evidenced by all of the oncoming infrastructure.  While there are crackdowns on specific junkets from time to time, there is nothing unusual going on.
  • $16MM hit to EBITDA at CoD, offset by $10MM benefit at Altira using 2.85% to normalize (we use something higher since historical hold is closer to 2.9%)
  • Slot business performed very well primarily due to the opening of their VIP slot area. Took a few months post opening for that area to ramp up.
  • Altira: Removed about 40 tables and moved them to CoD, but at the same time they are doing the same volume at that property.  
  • What's driving the good hold on the Mass tables at CoD:  Improved efficiency and length of play.  Improved their F&B area, used selective marketing in the past.  Minimum bet levels have also increased. 
  • MCE: capex: $75-100MM of maintenance; MSC they have an obligation to fund $825MM of cash into the project. $285MM remains to be funded from cash. They also have a sponsor guarantee which they will fund $225MM of or 60% of that. For the Philippines:  $450-475MM this year is expected to be spent. They have a few options on how they want to fund the Phillipine capex.
  • There are a number of covenants that were relaxed
  • They are always completely full during CNY.  However, during the first few days of CNY, people usually stay home with their families
  • They would love to increase their ownership of the MSC
  • MSC: heavy duty construction mode since this summer. 95% of the piling work is complete. Have about 500 workers on site. So far the main contractor is doing a great job
  • Manila: Hope the closing of their agreement with their partner will occur in the next month. Some work being done right now on Phase I - structurally. 
  • Given their experience of opening CoD during the financial crisis they are more conservative about leveraging up to pay a dividend during a heavy construction period.  If the openings go well, then they will likely revisit paying a dividend in early 2014.
  • In May, they expanded their premium mass footprint.  It took some time to improve performance on that space. They also completed their renovation of the high limits premium mass area recently. Sees the momentum in their mass business continuing for the rest of the year. 
  • Feel like they have the best partner in the Philipines and what they are building will be very well received 



  • MPEL reported $1,101MM of net revenues and $247.5MM of Adjusted EBITDA, 3% and 4% ahead of the Street, respectively
    • COD: net revenue of $772.5MM and Adj EBITDA of $219.5MM
      • We estimate that below normal hold negatively impacted EBITDA by $18MM
    • Altira: net revenue of $281.7MM and Adj EBITDA of $43.8MM
      • We estimate that higher than normal hold boosted  EBITDA by $8MM
  • “Successfully priced a US$1BN senior note offering at an attractive 5.0% coupon, which will allow us upon completion to, among other things, refinance our US$600MM 10.25% senior notes."
  • “Studio City remains on track to open around the middle of 2015. We successfully raised US$825 million under our Studio City senior note offering and signed the facilities agreement with the lead arranging banks in relation to our US$1.4 billion Studio City senior secured facilities, both of which are achieved without a corporate guarantee from the Company, while the latter is accomplished based on limited sponsor support from the Company. Together with full contribution of committed shareholder equity, these financings upon full drawdown are expected to deliver a fully funded project at the Studio City level. Our funding approach, together with our fixed price, lump-sum, contracting strategy provides us with greater certainty regarding cost and timetable."
  • “During the fourth quarter, we completed the acquisition of a majority interest in Manchester International Holdings Unlimited Corporation, a company listed on the Philippines Stock Exchange. We remain on track to open our unique integrated casino resort in mid-2014."
  • Capex: $76.7MM "primarily related to various projects at City of Dreams, as well as design and construction costs associated with Studio City"

Dynamic Debauchery

Client Talking Points

The Clan In Japan

Japan’s dynamic duo of Finance Minister Taro Aso and Prime Minister Shinzo Abe are really on a roll with this whole “plan” of theirs. They want to “stabilize” the  Yen and target “2% inflation.” And yet since the Bernanke Top in September 2012, the Yen has fallen -17%. In turn, the Nikkei is up +32.4% since mid-November when #GrowthSlowing stopped. You can’t have your cake and eat it too, so the question remains: when is enough, enough? You can only devalue that Yen so far and you can only artificially pump stocks so much higher. Keep in mind that when consumption slows, growth slows, and that’s not something Aso & Co. want to see. 

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


“When did RBS think their LIBOR investigation was going poorly? Maybe it was when they saw a trader talk about LIBOR fixing in an email.” -@PeteSchroeder


“If you haven't found something strange during the day, it hasn't been much of a day.” -John A. Wheeler



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TODAY’S S&P 500 SET-UP – February 6, 2013

As we look at today's setup for the S&P 500, the range is 14 points or 0.61% downside to 1502 and 0.31% upside to 1516.               














  • YIELD CURVE: 1.72 from 1.74
  • VIX  closed at 13.72 1 day percent change of -6.48%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Feb. 1 (prior -8.1%)
  • 9am: U.S. Treasury quarterly refunding announcement for auction of 3Y, 10Y and 30Y debt
  • 10:30am: DoE Energy Inventories
  • 11am: Fed to purchase $3b-$3.75b debt in 2018-2020 sector


    • House Budget Cmte hears from CBO Director Douglas Elmendorf on budget, economic outlook, 9:30am
    • House Financial Services Cmte holds hearing on role of FHA in housing insurance market, 9am
    • John Kerry to be sworn in as 68th U.S. Secretary of State
    • Bloomberg Government, Nuclear Energy Institute host discussion on fracking, tax credits, offshore drilling, nuclear energy, w/ Sen. Johnny Isakson, R-Ga., Rep. John Shimkus, R-Ill., 8:45am
    • Postmaster General Patrick Donahoe makes announcement about Postal Service operational changes, 10am


  • Malone’s Liberty Global to acquire Virgin Media for $16b
  • Obama urges delay of U.S. spending cuts to avoid economic harm
  • Chief executives’ confidence in U.S. economy improves in survey
  • Google said in talks to invest $50m in Vevo Music service
  • Biogen to pay Elan $3.25b for full rights to Tysabri
  • JPMorgan said to cut investment bank pay 3%, asset managers gain
  • RBS said to face up to $783m Libor manipulation fine
  • Morgan Stanley bankers Whayne, Rashid said to depart amid cuts
  • Flagstar ordered by N.Y. judge to pay bond insurer $90.1m
  • Boise Cascade raises $247m pricing IPO above range
  • Facebook director James Breyer sells $74m worth of shares


  • WR Grace (GRA) 6am, $1.06
  • Macerich (MAC) 6am, $0.87
  • TMX Group (X CN) 6am, C$0.73
  • Coventry Health Care (CVH) 6:30am, $0.68
  • Wyndham Worldwide (WYN) 6:30am, $0.60
  • CVS Caremark (CVS) 6:45am, $1.10 - Preview
  • Intact Financial (IFC CN) 6:55am, $1.34
  • Time Warner (TWX) 7am, $1.10
  • Westjet Airlines (WJA CN) 7am, $0.43
  • Scotts Miracle-Gro (SMG) 7am, C$(1.13)
  • Apollo Investment (AINV) 7:30am, $0.21
  • Cummins (CMI) 7:30am, $1.75
  • AGL Resources (GAS) 7:30am, $0.97
  • Husky Energy (HSE CN) 7:30am, C$0.57
  • IntercontinentalExchange (ICE) 7:30am, $1.74
  • Nu Skin Enterprises (NUS) 7:30am, $0.95
  • Marathon Oil (MRO) 7:39am, $0.67
  • Melco Crown (MPEL) 7:40am, $0.21
  • Madison Square Garden (MSG) 8am, $0.36
  • Prologis (PLD) 8am, $0.41
  • Ralph Lauren (RL) 8am, $2.20 - Preview
  • USG (USG) 8:30am, $(0.25)
  • IAC/InterActive (IACI) 4pm, $0.74
  • Akamai Technologies (AKAM) 4pm, $0.50
  • Green Mountain Coffee Roasters (GMCR) 4pm, $0.65
  • News Corp. (NWSA) 4pm, $0.43
  • Spectrum Brands Holdings (SPB) 4pm, $0.71
  • WMS Industries (WMS) 4pm, $0.15
  • Cincinnati Financial (CINF) 4:01pm, $0.49
  • CYS Investments (CYS) 4:01pm, $0.39
  • Mettler-Toledo International (MTD) 4:01pm, $3.20
  • Two Harbors Investment (TWO) 4:01pm, $0.33
  • Stericycle (SRCL) 4:02pm, $0.86
  • CBRE Group (CBG) 4:04pm, $0.48
  • PartnerRe Ltd (PRE) 4:04pm, $(0.46)
  • Allstate (ALL) 4:05pm, $(0.05)
  • Atmel (ATML) 4:05pm, $0.02
  • Everest Re (RE) 4:05pm, $0.27
  • Visa (V) 4:05pm, $1.79
  • Yelp (YELP) 4:05pm, $(0.05)
  • Equifax (EFX) 4:07pm, $0.75
  • Plains All American Pipeline (PAA) 4:07pm, $0.76
  • Prudential Financial (PRU) 4:07pm, $1.74
  • Lincoln National (LNC) 4:08pm, $1.06
  • Assurant (AIZ) 4:15pm, $(0.31)
  • Gildan Activewear (GIL CN) 4:21pm, $0.30
  • RenaissanceRe Holdings Ltd (RNR) 4:22pm, $0.30
  • FMC (FMC) 4:30pm, $0.81
  • Tesoro (TSO) 4:45pm, $1.39
  • O’Reilly Automotive (ORLY) 6:30pm, $1.08
  • Fifth Street Finance (FSC) Post-Mkt, $0.27


  • Merchant Commodity Hedge Fund Cuts Jobs After Second Losing Year
  • Carmakers Use Aluminum Over Steel in Boost for Rio: Commodities
  • Platinum Climbs to a 16-Month High, Extending Premium Over Gold
  • Copper Falls as Commodities Drop on Euro-Area Political Concern
  • WTI Crude Slips, Discount to Brent Widens to Most This Year
  • Soybeans Decline as Brazilian Harvest Estimate Raised on Yields
  • Sugar Falls as Price Drop Seen Needed to Curb Glut; Cocoa Slides
  • Palm Output Plunging Most Since ’10 in Malaysia to Cut Reserves
  • Rebar Declines Amid Waning Liquidity Ahead of Lunar New Year
  • Palm Oil Drops to One-Week Low as Inventories Seen Near Record
  • Iran Cash Faces Tighter Squeeze as Oil Export Rules Stiffen
  • Duke Reactor Shutdown Plan Shows Shale’s Sway Over Power: Energy
  • India’s Cabinet May Consider More Wheat Exports Tomorrow: Pawar
  • China Gold Imports From Hong Kong Climb to Record on Wealth



















The Hedgeye Macro Team





Morning Reads From Our Sector Heads

Todd Jordan (GLL):


-Door is about to slam shut on high-rolling holidays to Macau


Rob Campagnino (Consumer Staples):


-ADM lifts profits despite US drought


Kevin Kaiser (Energy):


-Suncor Energy reports 2012 fourth quarter results


-Nuclear Talks Between Global Powers Set to Start


Brian McGough (Retail):


-Penney's Johnson seen slashing jobs


Howard Penney (Restaurants):


-Sex sells burgers


Yes, there was another bid but that was unsolicited as well.  No wonder the rest of the industry players were caught off guard.



The ASCA/PNK proxy agreement was an interesting read.  It certainly increased our optimism that there could be a competing bid and confirmed our belief that the rest of the industry was a bit caught off guard.  No other bids were solicited so potential buyers such as MGM, PENN, BYD and maybe PE firms were likely unaware.  But there was more including a surprise 2nd bidder (unsolicited), some questionable advice by bankers, a pretty big payout to ASCA management, and a more dismal outlook for 2013 fundamentals than maybe the Street was expecting.


Here are our takeaways:

  • CHDN was likely “Bidder 1”.  The Agreement mentioned that Bidder 1 made an unsolicited offer that included stock, had a stock that was near an all-time high, was licensed in fewer jurisdictions than ASCA, and that the acquisition would be transformational to that company.  The only other companies with stocks near all time highs are PENN and MPEL, but we can rule both of them out because ASCA would not be a transformational acquisition to either.
  • ASCA’s advisors convinced the ASCA Board that soliciting other bids would not have resulted in a price significantly higher than $26.50 and would’ve jeopardized the PNK offer due to the a longer timetable.  The advisors felt that no other bids would be forthcoming since ASCA conducted a process to sell the company in 2010 and were unsuccessful.  We would argue that it was a different time and operators are in a much better position financially today.  Moreover, given the reaction in PNK’s stock, ASCA left a lot on the table indicating that higher bids could’ve been successfully solicited. 
  • Other issues brought up by the advisors were that:
    • Bidder 1 refused to release non-public info requested by the Board to evaluate the value of their stock  - Probably due to competitive reasons related to CHDN’s on-line business
    • Pressure from some shareholders wanting to cash out could have put selling pressure on Bidder 1 stock – In retrospect, CHDN’s stock would’ve likely gone up materially. 
    • Bidder 1’s stock was close to all-time highs – We don’t find this relevant.

The advisors also made a claim that investors would not have been appreciative of the tax advantages of a partial stock deal.  This seems spurious.

  • The fact that MGM, PENN, BYD, nor any other operator was involved in the process increases our optimism that there could be a competing bid.  PENN could obviously pay the highest multiple given their future REIT structure and strong balance sheet but MGM could do a deleveraging and very accretive deal while adding additional value through the use of its NOLs.
  • ASCA can still negotiate unsolicited bids until the shareholder vote
  • It is possible that CHDN’s offer of $26 with 40% in stock could’ve actually been superior.  PNK’s stock appreciated 21% the day they announced the transaction and CHDN would’ve no doubt experienced a big increase in the share price as well which would’ve ultimately accrued to ASCA shareholders.  Moreover, the favorable tax treatment for investors receiving ASCA would have to be factored in as well.
  • There are a number of lawsuits arguing that ASCA is not acting in the best interest of shareholders.  We also believe that some institutional owners are not happy that additional bids were not solicited.  There seems to be a lot of pressure on the company to certainly entertain unsolicited bids.
  • ASCA management’s projection for 2013 EBITDA was approximately 3% below current consensus estimates.  We think the sell side continues to be a little aggressive on regional gaming projections for 2013.  Our thesis remains that US casinos face structural (fewer slot players) and economic (highly economically sensitive) headwinds.  Of course, this could argue against accepting stock from a bidder since any fundamental weakness would theoretically accrue to the buyer and potentially hurt its stock price.
  • ASCA spent $6 million on professional fees
  • A whopping $43 million of severance is owed to management

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