"I am pleased to announce another record quarter of EBITDA and EBITDA margin for our Company. We continue to deliver strong growth in gaming fundamentals and profitability through a clear focus on execution across our exceptional portfolio of operating assets. City of Dreams mass market tables were again the most productive mass market tables of all major properties in Macau, which is particularly important in a table constrained market."


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




  • Margins across all their mass margin segments have shown improvement, which is apparent in their results. Also delivered record RC volumes despite a reallocation of VIP tables to premium mass
  • Heguin island continues to develop
  • Believe that their expertise in Macau will be a competitive advantage in the Phillipines
  • MSC remains on time and on budget to open in 2015.
  • Moving forward with their PH3 expansion at CoD. Optimistic that they will break ground before YE 
  • On a luck adjusted basis, 1Q13 EBITDA would have been $280MM using a win rate of 2.85%
  • Recently paid down the balance of their R/C by $200MM, reducing annual interest by $4MM
  • Non-operating guidance for 2Q
    • D&A: $90-95
    • Corporate: $20-22MM
    • Interest expense: $40-42MM (finance lease interest of 10MM on MCP and 11MM of interest in MSC)


  • Tax changes in the Phillipinnes?  Confident that the additional tax rate can be neutralized by other changes. The 4 casinos are united against the tax change. 
  • CoD: proposing to build an iconic hotel in tower 3 and get potentially more tables in the future. However, even without additional tables they believe that they can get a great return on that project.
  • Smoking ban?  Recognize that the quality of the air in the casino needs to be cleaner. For now though, they believe that their air quality is cleaner than hospitals. 
  • Pick up in volume in VIP RC? Believe that the change in the government transition that was completed in March assured many of their customers and removed a cloud of uncertainty, so now people are comfortable to spend again. Also believe that a lot of CNY VIP customers stayed away because of overcrowding too. Their thoughts on growth for the year are a lot more optimistic than earlier in the year.
  • Anticipate that their capitalized number will rise throughout the course of the year
  • Capex budget for this year and next: still working on CoD budgeting for Ph3. Ex that, capex in 2Q will be in the $225MM range, and then $250MM in 3Q and around $400MM in 4Q
  • Mass hold rate:  the rising of the mass hold is due to the rising number of customers and the increased bet size of their customers. So they do think that the trend in the last 4 Q's is sustainable. 
  • Phenomonal margins in non-gaming? Sustainable going forward.
  • Think that in the Phillippines, the non-gaming amenities will be an even bigger contributor
  • Pre-opening expenses in Philipines- 2/3rd of their $1.9MM charge was related to the Phillipines. That pre-opening charge will increase throughout the year.
  • Working hard to close the gap between their margins at CoD and the competition. Do see continued favorable mix shift which should drive margins higher.  Their gaming revenues continue to approach those of Venetian.
  • Increased competition in the mass segment. Don't see any change in how much they need to reinvest in their mass segment to retain it. Some of their competitors have gotten more aggressive in pursuing the premium mass segment and some even provide rebate to them. They feel like this is the wrong strategy.
  • The increase in unique premium mass players to CoD has increased, but overall visitation is flat. 42,000 visitors per day at CoD over the last 2 months. 
  • Most of the piling work is substantially completed at MSC.  So they are now starting to come out of the ground. Approvals for labor have been very smooth. Have workers on site.
  • Think that the Phillipinnes will be a bigger market than most people expect. 
  • Minimum bet at CoD? They use a dynamic pricing strategy on the tables. They are forced to increase the min bets based on supply and demand. 
  • Update on Gongbei border expansion. Completed but on the Zhuhai side, they are still working on the expansion- should be completed by October. They are also excited about the expansion of border hours, in particular the Lotus Bridge border.
  • MSC spend in 1Q13: $40MM
  • Total 2013 MSC Capex spend: $800-1BN 
  • Altira: 141 VIP tables/ 32 Mass
  • CoD: 212 VIP and 240 Mass
  • Taiwan: they are cooperating with authorities. Maintain that they have done nothing wrong or different from their competitors
  • Walkway between CoD and SCC? Working with Sands China on coming up with a solution - waiting on their neighbor
  • ETG seats being added at CoD: Total 190 stations at the moment. the performance of the stations has been roughly 50% above the slot average. 
  • As of April, there should be a market wide wage rate increase of 5% in Macau



  • Net revenue of $1,145MM and Adjusted EBITDA of $273.5MM
  • The increase in net revenue was primarily attributable to higher group-wide rolling chip volumes and mass market gross gaming revenues, partially offset by a lower group-wide rolling chip win rate
  • The year-over-year increase in Adjusted EBITDA was attributable to strong improvements in mass market performance at City of Dreams, improved group-wide rolling chip volume and our continued focus on cost control, partially offset by a lower group-wide rolling chip win rate.
  • CoD: Net revenues of $836MM and Adjusted EBITDA of $247MM
    • The significant year-over-year improvement in Adjusted EBITDA was primarily a result of substantial growth in mass market table games volumes and improved mass market table games hold percentage together with strong growth in rolling chip volumes, partially offset by a lower rolling chip win rate
  • Altira: Net revenue of $265MM and Adjusted EBITDA of $40MM
    • The reduction in Adjusted EBITDA was primarily a result of a lower rolling chip win rate, partially offset by improved rolling chip volumes
  • The VIP segment in Macau has delivered robust growth in the first part of 2013 while the mass market table games segment remains on its impressive growth trajectory. We continue to be optimistic regarding the market's performance in 2013 and beyond, and expect the introduction of new infrastructure and policy initiatives over the short to medium term, as well as the expansion of Hengqin Island, will further support visitation growth and increasing spend per customer as Macau offers a more diverse offering of entertainment and leisure amenities.

  • Melco Crown Philippines, our majority owned subsidiary, recently completed a Top-Up Placement on the Philippines Stock Exchange raising approximately US$325 million in net proceeds, excluding the over-allotment option which, together with a shareholder loan commitment made by Melco Crown Entertainment, are expected to provide the funding necessary to open our unique integrated casino resort in Manila in mid-2014. The resort in Manila is expected to have approximately 967 rooms and suites, 242 gaming tables and approximately 1,450 gaming machines in addition to a range of entertainment and other non-gaming amenities to attract a wide variety of local and inbound customers.
  • MCP incurred ~$5MM of operating expenses, primarily relate to general and administrative expenses, land rental payments and other fees and costs associated with the corporate reorganization of MCP.
  • Non-operating expenses included:
    • US$61.4 million one-off charge associated with the extinguishment and modification of debt relating to the refinancing of our 10.25% senior notes.
    • Foreign exchange loss of US$4.4 million
    • US$4.1 million of capitalized interest... primarily relating to Studio City
  • Melco Crown Entertainment also incurred US$17.1 million of development costs, which predominantly relate to fees and costs associated with the corporate reorganization of MCP by the Company.
  • Cash: $2.5BN (including $1BN of restricted cash) and debt: $2.7BN
  • Capex: $79MM, primarily related to MSC and MCP and projects at CoD

S&P 500: Which Way Will It Go?

The market is getting tighter and has people on their toes this week. The S&P 500 is big on making a new all-time high every week it seems but 1626-1630 is not where you want to be chasing this index. It has the ability to fall off a cliff with no support until 1599. This week's economic data is what matters since a positive or less-than-bad number will keep the public happy.


S&P 500: Which Way Will It Go? - SPY ytd

Let's Go Crazy

Client Talking Points

Higher and Higher

The market is quite keen on going up these days. While some would argue a bullish case based on specific factors, we argue and make our bull case from a growth and consumption standpoint. US economic growth and consumption continue to gain and surprise on the upside via employment numbers and the like.

Squeezing Commodtities

Commodities continue to get squeezed, going the opposite way of the stock market. The CRB Commodities Index was down -0.4% yesterday and continues to look awful right now. Gold is the big one that everyone is focused on and continues to fail at our 1492 line of resistance. Oil is up next and lower prices at the pump help boost consumption.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.  


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.

Three for the Road


"Always fun to break news faster than those paid to break it #OldMedia" -@KeithMcCullough


"The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true." -James Branch Cabell


China April Exports Rise 14.7% As Imports Gain 16.8%.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


TODAY’S S&P 500 SET-UP – May 8, 2013     

As we look at today's setup for the S&P 500, the range is 71 points or 4.12% downside to 1559 and 0.25% upside to 1630.










  • YIELD CURVE: 1.57 from 1.56
  • VIX  closed at 12.83 1 day percent change of 1.34%

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, May 3  (prior 1.8%)
  • 8:30am: Fed’s Stein speaks at Chicago Fed conference
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $3b-$3.75b debt in 2019-2020 sector
  • 1pm: U.S. to sell $24b 10Y notes


    • 9am: Congressional Progressive Caucus event w/ low wage workers employed under federal contracts, w/ Reps. Raul Grijalva, D-Ariz.; Keith Ellison, D-Minn.; Barbara Lee, D-Calif.; Rep. Jan Schakowsky, D-Ill.
    • 9am: Mandiant CEO Kevin Mandia, Symentec cyber VP Cheri McGuire testify on Senate Judiciary Cmte panel on law enforcement, private sector responses to cyber threats
    • 10am: Senate Health, Education and Labor Cmte votes on nomination of Thomas Perez to Labor sec
    • 10am: House Natural Resources Cmte hearing on hydraulic fracturing
    • 11:30am: House Oversight holds Benghazi hearing
    • 11:30am: Sen. Chris Murphy, D-Conn., Rep. Mo Brooks, R-Ala., Rep. Tim Ryan, D-Ohio, participate in Alliance for American Manufacturing news conf. on supply chain vulnerabilities, natl security risks in defense industrial base
    • Sanford defeats Colbert’s sister in South Carolina


  • Yahoo CEO Mayer said to seek ways to end Microsoft search deal
  • Microsoft CFO search said to pit Windows’ Reller against Hood
  • Sprint said to press Dish for details before its due diligence
  • Fannie Mae settles investor accounting lawsuit for $153m
  • Whole Foods raises annual forecast as same-store sales improve
  • “Bullish” about acquiring regional food stores
  • J.C. Penney reports 1Q prelim. sales drop below ests.
  • Walt Disney 2Q adj. EPS, revenue beat estimates
  • Electronic Arts projects annual profit exceeding analyst ests.
  • WebMD’s CEO Redmond steps down as co. raises sales forecast
  • Toyota forecasts profit will rise to 6-yr high on weaker yen
  • China export gains spur doubts as U.S., Europe shipments fall
  • Berkshire agrees to limit DaVita stake after weighing increase
  • China’s CNPC said in talks to buy Brazil’s Barra for $2b
  • Apple seeks documents on Android source code in Samsung lawsuit
  • Bristol-Myers sues Genentech claiming “Cabilly” patents invalid
  • Tom Mockridge is named CEO of Virgin Media on Liberty deal
  • Ackman, Einhorn, Eisman to speak at Ira Sohn conference


    • Calfrac Well Services (CFW CN) 6am, C$0.50
    • Susser Holdings (SUSS) 6am, $(0.05)
    • Lamar Advertising (LAMR) 6am, $(0.03)
    • Cognizant Technology Solutions (CTSH) 6am, $0.93
    • Calumet Specialty Products (CLMT) 6:30am, $1.03
    • Franco-Nevada (FNV CN) 6:30am, $0.27
    • Starwood Property Trust (STWD) 6:45am, $0.46
    • Intact Financial (IFC CN) 6:55am, $1.32
    • CommonWealth REIT (CWH) 7am, $0.73
    • Wendy’s (WEN) 7am, $0.03
    • Enbridge (ENB CN) 7am, C$0.52
    • AOL (AOL) 7am, $0.45
    • Genivar (GNV CN) 7am, C$0.35
    • Huntington Ingalls Industries (HII) 7:15am, $0.85
    • Sodastream (SODA) 7:30am, $0.65
    • Geo Group (GEO) 7:30am, $0.38
    • Tim Hortons (THI CN) 7:30am, C$0.61
    • Cedar Fair (FUN) 7:35am, $(1.20
    • Brookfield Renewable Energy  (BEP-U CN) 8am, $0.17
    • Vivus (VVUS) 8:15am, $(0.52)
    • Allete (ALE) 8:25am, $0.75
    • Liberty Interactive (LINTA) 11:45am, $0.19
    • News Corp (NWSA) 4pm, $0.35 - Preview
    • Linamar (LNR CN) 4pm, C$0.60
    • Cousins Properties (CUZ) 4pm, $0.12
    • Green Mountain Coffee Roasters (GMCR) 4pm, $0.73
    • Tower Group International (TWGP) 4pm, $0.53
    • Groupon (GRPN) 4pm, $0.03
    • Quebecor (QBR/B CN) 4pm, C$0.61
    • Rackspace Hosting (RAX) 4pm, $0.20
    • Quantum (QTM) 4:01pm, ($0.01)
    • St Joe (JOE) 4:01pm, $(0.01)
    • Sunoco Logistics Partners (SXL) 4:01pm, $0.82
    • MarkWest Energy (MWE) 4:01pm, $0.26
    • Polypore International (PPO) 4:01pm, $0.41
    • Tumi (TUMI) 4:01pm, $0.15
    • MBIA (MBI) 4:01pm, $0.15
    • Andersons (ANDE) 4:01pm, $0.87
    • J2 Global (JCOM) 4:03pm, $0.65
    • Tesla Motors (TSLA) 4:03pm, $0.04 - Preview
    • CenturyLink (CTL) 4:04pm, $0.68
    • Activision Blizzard (ATVI) 4:05pm, $0.11 - Preview
    • Monster Beverage (MNST) 4:05pm, $0.46
    • Dealertrack Technologies (TRAK) 4:05pm, $0.26
    • Clean Energy Fuels (CLNE) 4:05pm, $(0.06)
    • SemGroup (SEMG) 4:05pm, $0.36
    • Shutterstock (SSTK) 4:05pm, $0.16
    • McDermott International (MDR) 4:10pm, $0.14
    • Corrections of America (CXW) 4:10pm, $0.48
    • Finning International (FTT CN) 4:14pm, C$0.47
    • Veresen (VSN CN) 4:14pm, C$0.05
    • Schweitzer-Mauduit International (SWM) 4:15pm, $0.92
    • CF Industries Holdings (CF) 4:15pm, $6.00
    • Oiltanking Partners (OILT) 4:15pm, $0.41
    • Hawaiian Electric Industries (HE) 4:15pm, $0.38
    • RLJ Lodging Trust (RLJ) 4:25pm, $0.37
    • Fifth Street Finance (FSC) 4:41pm, $0.28
    • Regency Energy Partners (RGP) 4:45pm, $0.03
    • Liberty Media (LMCA) 4:45pm, $0.41
    • Energy Transfer Partners (ETP) 4:53pm, $0.46
    • Transocean (RIG) 4:56pm, $0.99 - Preview
    • (CTRP) 5pm, $0.24
    • American Financial (AFG) 5pm, $0.83
    • Home Capital Group (HCG CN) 5pm, C$1.67
    • Atlas Energy (ATLS) 5pm, $(0.01)
    • Atlas Resource Partners (ARP) 5pm, $0.23
    • Sun Life Financial (SLF CN) 5:10pm, C$0.66
    • Energy Transfer Equity (ETE) 5:10pm, $0.53
    • EPAM Systems (EPAM) 5:40pm, $0.34
    • Alon USA Energy (ALJ) 5:45pm, $0.55
    • Continental Resources (CLR) 5:48pm, $1.14
    • Granite REIT (GRT-U CN) 5:51pm, $0.69
    • Tronox (TROX) 5:56pm, $(0.21)
    • Quad/Graphics (QUAD) 6:30pm, $0.15
    • Crosstex Energy (XTEX) 7pm, $(0.25)
    • Delek US Holdings (DK) 11pm, $1.18
    • Middleby (MIDD) Aft-mkt, $1.31
    • Trican Well Service (TCW CN) Aft-mkt, C$0.18
    • Northland Power (NPI CN) Aft-mkt, $0.06
    • Alon USA Partners (ALDW) Aft-mkt, $1.44
    • Calloway REIT (CWT-U CN) Aft-mkt, C$0.45
    • Northern Property REIT (NPR-U CN) Aft-mkt, C$0.50


  • Iron Ore Seen Dropping by BHP as Supply Growth Tops Demand
  • KKR to Goldman Breach Decade-Long Water Deal Dam: Commodities
  • Gold Rises in New York Amid Signs of Physical Demand in China
  • Copper Rises in New York After Gains in China Signal More Demand
  • Gold Assets in Fund Paulson Holds Decline to Four-Year Low
  • China’s Gold Purchases From Hong Kong Expand to Record in March
  • Sugar Declines on Brazilian Harvest Progress; Coffee Retreats
  • Rebar Advances After China’s Trade Performance Beats Estimates
  • Gold Eroding Farmer Collateral May Boost Defaults: India Credit
  • Carbon Rout Roiling Australia as Polluters Win: Energy Markets
  • China Copper Imports Drop 21.1% Yoy as Demand Slows: BI Chart
  • Copper Consumers Seen by Boliden Holding Very Low Stockpiles
  • Fed Panel Warned of Farmland Bubble Amid Increasing Credit Risk
  • Gold Imports by India Seen Topping 100 Tons for a Second Month






















The Hedgeye Macro Team











Arrow Points Up

This note was originally published at 8am on April 24, 2013 for Hedgeye subscribers.

“Entropy is time’s arrow.”

-Arthur Eddington


That’s not a new reality. But it’s always an important one to remember. Arthur Eddington was the British astrophysicist who first called entropy “time’s arrow” in his 1927 book, The Nature of the Physical World.


You don’t have to be a physics guru to understand the concept of entropy. The 2nd law of thermodynamics calls entropy the price paid by an ecosystem when energy changes. I love applying that thought to markets – particularly when they are undergoing phase transitions.


“The rates of change of entropy differs for each specific event. All the while the rate of change of time itself is taken to be uniform, ceaseless, and non-negotiable.” (Chaisson, Cosmic Evolution, pg 31)


Back to the Global Macro Grind


Moving fast, and slow. That’s what markets do. If you could have a signal to probability weight that the market’s entropy is about to change fast, you’d take it. Or at least I would. Some signals really matter.


One of the most basic relationships in a market is expected price versus volatility. The key word is expected. The two factors (price and volatility) have to be contextualized across multiple durations.


With those thoughts in mind, let’s look at the price of the SP500 vs front-month US Equity Volatility (VIX):

  1. SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  2. VIX is in a Bearish Formation (bearish TRADE, TREND, and TAIL)

Three days ago, points 1 and 2 were not true:

  1. SP500 was bearish TRADE (below 1557)
  2. VIX was bullish TRADE (above 14.82)

In between now and then, you were allowed to make a risk managed move (buy and/or cover) on the explicit signal (SPX breaking out, back above 1557, and VIX breaking down through 14.82). You were also allowed to ignore my signal. It’s a free world, sort of.


I rarely ignore my signal.


Obviously I am simplifying this basic relationship between expected price/volatility. I can front-run the gotcha guys who will say that using front-month VIX instead of the implied term-structure of volatility’s curve is a mistake. But why is it if the signal works?


Mixing theory with practice is a dangerous game. You don’t have to take my word for it on that – try it with your own money at home. Some have mathematical theories. Some have qualitative theories. There’s a lot of baggage in theories that don’t embrace change.


My sense is that consensus still isn’t bullish enough on the SP500. My sense is that consensus isn’t bearish enough on US Equity Volatility. But, to be clear, my senses aren’t based on how I feel. My sense is my signal.


What is the most probable path that consensus considers improbable this morning?

  1. SP500 going to 1603
  2. VIX dropping to 10.97

Do you disagree with that? Why?


On Thursday (last week) at 3PM EST here’s where the market was:

  1. SP500 = 1538
  2. VIX = 18.16

This morning:

  1. SP500 = 1578
  2. VIX = 13.48

The context of this 3-day move (across durations) matters. Intermediate-term TREND support for the SP500 (1515) wasn’t violated on the downside inasmuch as intermediate-term TREND resistance for the VIX (18.89) didn’t break-out on the upside.


Should there be a difference between how you feel about a market when volatility drops 25% in a straight line? Should you make decisions based on feelings? Or should you re-model what’s becoming more or less probable for different expected price and volatility parameters?


I’m asking too many questions this morning. And I apologize for that. Maybe I should have just written a one sentence Early Look that said my model is signaling an up arrow for the SP500, and a down one for VIX to 1603 and 10.97, respectively.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1286-1454, $96.68-104.06, $82.47-83.19, 97.27-101.31, 1.68-1.80%, 10.97-14.82, and 1557-1603, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Arrow Points Up - Chart of the Day


Arrow Points Up - Virtual Portfolio