Even on a luck-adjusted basis, results missed expectations.  Less optimistic on VIP market than last Q.




  • Korea:  Jeju opportunity will meet IRR goal.  Has good database of customers.
    • Will start construction in 3Q 2014
    • According to Jeju law, have to invest US$300MM, then can apply for gaming license.  Some risk involved but it should be just a formality.
      • Genting Singapore did not get gaming license until one week before they opened
    • May invest more $$$ once they have more clarity on Korean market; possibly 1-2 more deals
    • Jeju capex:  will not provide that # at this time; need govt approval  
    • Why 5% stake in LIDL?  Business gesture.
    • CRA does have oversight over all GENT investments
    • Will have real estate in the Jeju project 
  • Japan:  believe 1st gaming bill may be passed some time in June 2014.  There will be a 2nd gaming bill.
    • Does not see any construction until 2017
    • Tokyo/Osaka being talked about
  • Adjusted EBITDA hold impact:  $60-70MM
  • VIP win rate:  2.5%
  • GGR share:  50%
  • VIP RC share:  53%
  • Mass volume share:  43%
  • Slot volume share:  44%
  • VIP revenue as a % of net revenue:  36%
  • VIP revenue as a % of gross revenue:  57%
  • Mass table hold is about 22%. 
  • Trade receivable impairment going up:  because RC volume went up
  • Combined mass market in Singapore:  flat growth; regional currency has depreciated vs S'pore $ - affecting casino and non-gaming.  
  • 4Q higher cost structure:  more prudent in provisions impacted margins; everything else has been consistent with past Q.  Cost structure different from MBS - payroll costs higher, operating expenses also different
  • May see some growth in the mass market in 2014
  • 'Cautiously optimistic' on the VIP market - many uncertain things going on in China
  • RMB will be appreciating against S'pore $.  RMB won't have any effect on VIP business. However, all Southeastern currencies have depreciated against S'pore $ - mostly affect very low end and very high end segments.  
  • 20,000 daily visitors (11,700 are to USS, rest from aquarium), average spend for USS: $83, average spend for aquarium is $30;  
  • VIP volume will not be impacted by currency; cautiously optimistic on volume

CAT: A Look At The K



CAT’s 10-K is a beast to review.  Below, we highlight changes and unexpected items, as well as new or broader disclosure on items relevant to earnings.  We may yet have more on the filing and still have some questions, but this is our first pass and we have already had a couple of rounds with the company.   It seems to us that several reserves/allowances moved to boost earnings – one time even when appropriate (benefit of ~$160 mil for loan loss and warranty).  The risk language also moved to better match our view of mining equipment, as it now mentions “industry overcapacity”.  Given DRC’s 2014 guide down yesterday*, we may yet see that kind of language applied to Power Systems in the 2014 10-K, a segment where order backlog declined last year. 





  • 2011 & 2012 Revisions:  We have read in the 2013 10-Qs that Cash from Operating Activities was revised because of interest payments on Cat Financials bank borrowings being moved from the Financing section ($57 and $53 mil in 2012 and 2011, respectively).  However, we got additional revisions in the 10-K: 

“We have also revised previously reported balances on Statement 3 as of December 31, 2012 and 2011 to correct for customer advances invoiced but not yet paid. Receivables - trade and other decreased from the amounts previously reported by $386 million and $228 million as of December 31, 2012 and 2011, respectively. Customer advances decreased from the amounts previously reported by $340 million and $204 million as of December 31, 2012 and 2011, respectively. Other (long-term) liabilities also decreased from the amounts previously reported by $46 million and $24 million as of December 31, 2012 and 2011, respectively. Although the revision did not impact Net cash provided by (used for) operating activities on Statement 5, we have revised the impacted operating cash flow line items for the years ended December 31, 2012 and 2011.”


While not overwhelming in magnitude, it continues a trend of revisions and incorrect reporting that can attract unwanted scrutiny and suggest a lack of reporting diligence.  Both interest payments and cash from customer advances seem reasonably straightforward to categorize, at least to us.

  • New Risk Sounds Familiar:  In discussing the risks to CAT’s sales outlook, the following text is inserted or a weak pricing environment attributable to industry overcapacity. That addition is consistent with our Resource Industries outlook. (See CAT & The Mining Investment Bubble from July 2012 or subsequent Black Books)
  • ASR Timing:  While not new, the accelerated stock repurchase is “expected to be completed in March 2014,” which coincides well with the CAT Analyst Day March 4th at ConExpo.  Buying $1.7 billion (~3 days volume) in such a short time period seems like a good idea for the presenting management team, but maybe not for long-term investors.
  • Warranty Liability Down:  CAT’s warranty liability dropped by $110 million, while warranty payments in 2013 increased slightly.  The drop may be due to the decline in new warranties vs. previous years because of reduced equipment sales.  Nonetheless, it is a nonrecurring earnings benefit, all else equal.
  • Loan Loss Reserve Down:  While we already covered this one in a historical context here, it’s worth noting that write-offs, TDRs, and total loans and leases increased in 2013.  That seems hard to reconcile with a cut in allowance for credit losses to multi-year % of assets low.  Even if it is appropriate, it is a non-recurring earnings boost, all else equal. “The allowance for credit losses as of December 31, 2013 was $375 million compared with $423 million as of December 31, 2012.  The overall decrease of $48 million in the allowance for credit losses during the year reflects a $55 million decrease associated with the lower allowance rate, partially offset by a $7 million increase due to an increase in Cat Financial's net finance receivables portfolio.
  • Unfriendly IRS?: Perhaps CAT did annoy the Obama administration. The company apparently does not like the preliminary results of its recent IRS field examination:  “While we have not yet received a Revenue Agent's Report generally issued at the end of the field examination process, we have received Notices of Proposed Adjustment from the IRS relating to U.S. taxation of certain non-U.S. operations and foreign tax credits. We disagree with these proposed adjustments, and to the extent that adjustments are assessed upon completion of the field examination relating to these matters, we would vigorously contest the adjustments in appeals.”
  • No Goodwill Impairment:  While the Bucyrus goodwill was not impaired, there is an added disclosure that is a little odd “In addition, only a portion of goodwill for certain acquisitions made in 2011 or later has been allocated to segments.”  Not sure on that one, but it will be interesting to see if the BUCY goodwill makes it through 2014.
  • Restructuring Can Be Painful:  CAT intends to finally do some restructuring this year, but this language begs the question of why one would hold the shares through the whole entire process.  CAT restructured during most of the 1980s and it was ugly for shareholders for nearly half a decade.  Here is the risk discussion “…we may incur additional charges, including but not limited to asset impairments, employee termination costs, charges for pension and other postretirement contractual benefits, potential additional pension funding obligations, and pension curtailments, any of which could be significant, and could adversely affect our financial condition and results of operations. In addition, we may not realize anticipated savings or benefits from past or future cost reduction actions in full or in part or within the time periods we expect. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with our cost reduction actions. Failure to realize anticipated savings or benefits from our cost reduction actions could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
  • Last Year’s Cost Performance:  While not exactly new, this disclosure fails to fill us with optimism on restructuring, since the LIFO liquidation looks like such a significant driver.  “Manufacturing costs decreased $167 million. The decrease was primarily due to lower material costs and $115 million ($0.12 per share) of LIFO inventory decrement benefits, partially offset by unfavorable changes in cost absorption resulting from a decrease in inventory during 2013 and an increase in inventory during 2012.”



*This is worth a look just to see a company’s guide-down actually buried in pig manure discussion



Takeaway: Long-term investors must prepare to defend their positions as shorter-term investors are forced to consolidate over the intermediate term.



  1. While we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.
  2. The USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.
  3. In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18:


Please note that the analyses below build upon the views we introduced last week in our FEB 12 strategy note titled, “KURODA VS. YELLEN: WHO BLINKS FIRST?”. To the extent you have yet to review that piece, we strongly encourage you to do so prior to digging into the analytics below.


Yesterday we returned back from holiday with two major pieces of GIP-related news out of Japan: the 4Q13 GDP report and the BoJ’s monetary policy decision. In our view, both are supportive of incremental consolidation in the Abenomics Trade (i.e. short JPY/long Nikkei). We purposefully wanted to give the foreign markets some time to absorb the news, given their dominance in determining the direction of this now ultra-consensus trade:


  • The JPY has declined -19% vs. the USD since Abe came into power in DEC ’12 in overseas trading while gaining +3.4% vs. the USD in Tokyo trading… it has declined a cumulative -15.3% on a correlation-weighted basis in aggregate
  • Foreigners acquired a net ¥15.1T of Japanese equities in 2013 (new record) vs. a net -¥8.8 of sales by Japanese individual investors (also a new record)… the Nikkei 225 and TOPIX indices finished 2013 up +56.7% and +51.5%, respectively
  • Foreigners sold a net -¥1.2T of Japanese equities in JAN ’14… the Nikkei 225 and TOPIX indices finished JAN -8.5% and -6.3%, respectively


If recent price trends weren’t enough confirming evidence, you’re actually seeing increasing foreign jitters reflected in a widening divergence between FX forecasts (banks) and FX forwards (investors and corporations). Note the respective deltas in these figures from when consensus [likely] piled into the world-beating Abenomics Trade at the end of last year (portfolio window dressing, anyone?), as evidenced by the net short position of speculators (futures + options) dropping from -56.8k in early OCT ’13 to -143k in late DEC ’13. The latter figure was the largest net short position since JUL ’07 and represented a -3.1x standard deviation move on a trailing 1Y basis (vs. +0.7x for the former print).




Fast forward to today, the USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.




As we outlined in the aforementioned strategy update, we don’t really have a ton of conviction in the direction of this trade with respect to the intermediate term (~3-6M). That being said, however, we are increasingly of the view that we’re likely to see incremental consolidation as consensus is forced by data to converge towards our view that:


  1. Japanese growth is slowing (see 4Q13 GDP report highlights below)
  2. The BoJ is likely to be slow to respond with a material degree of incremental easing – specifically relative to the Federal Reserve


Highlights of the 4Q13 GDP Report:


  • 4Q Real GDP: 1% QoQ SAAR from 1.1% prior vs. a Bloomberg consensus estimate of 2.8%
    • YoY: 2.7% YoY from 2.3%
    • Domestic Demand: 3.2% YoY from 2.3%
      • Private: 2.3% YoY from 1.5%; 3% QoQ SAAR from 2%
        • C: 2.4% YoY from 2.3%; 2% QoQ SAAR from 0.9%
          • Durable Goods: 15.1% YoY from 4.9%; 17% QoQ SAAR from 15%... can you spot the pre-consumption tax hike pull forward?
          • Semi-Durable Goods: 4.1% YoY from 5.7%; flat QoQ SAAR from -0.3%
          • Nondurable Goods: -0.1% from 2.3%; -1.4% QoQ SAAR from -1.8%
          • Services: 1.9% YoY from 2%; 1.5% QoQ SAAR from 0.4%
        • I-Residential: 10.5% YoY from 8.6%; 17.8% QoQ SAAR from 13.9%
        • I-Nonresidential: 1.8% YoY from -0.8%; 5.3% QoQ SAAR from 0.8%
      • Public: 5.8% YoY from 4.9%; 3.6% QoQ SAAR from 6.3%
        • G: 2.1% YoY from 2.2%; 2% QoQ SAAR from 0.9%
        • Public Investment: 20.9% YoY from 19%; 9.3% QoQ SAAR from 31.9%
      • Net Exports: -18.6% YoY from 3.3%
      • Nominal: 2.4% YoY from 1.9%
  • GDP Deflator: flat at -0.4%
    • QoQ SAAR: 0.4% from -0.4%




Highlights of the BoJ’s decision to expand its loan facility:


  • The BOJ doubled the core portion of the growth funding facility, which was established in 2010 to provide banks with funds at an interest rate of 0.1 percent, to 7 trillion yen ($68 billion)… Bloomberg
  • The loan facility is nearing its ceiling, with about 4 trillion yen dispersed so far, according to the BOJ. Banks use the funds to lend to industries from environmental technology to tourism and disaster prevention that are seen by the BOJ as having growth potential… Bloomberg
  • Borrowing costs for the nation’s lenders averaged 0.97 percent in the six months ended September, according to the latest data by the Japanese Bankers Association… Bloomberg
  • The three-month euro-yen Tokyo interbank offered rate, the price at which banks in the country’s capital are willing to lend to each other, held at about 0.22 percent in the past four months… Bloomberg
  • The BoJ maintained its outlook and assessment of the economy, saying that it "has continued to recover moderately."… StreetAccount


While Japanese credit growth has certainly benefitted from the BoJ’s easy monetary policy in recent quarters (as evidenced by Japanese banks’ holdings of JGBs shrinking -17% from the pre-Kuroda’s Casino era), the “Yotai Gap” (i.e. spread between bank deposits and loans) remains just shy of an all-time peak of ¥189.1T. Indeed, as we’ve been saying all along, it’s going to take a lot more than monetary policy cocaine for Japanese corporations and consumers to believe in the sustainability of the LDP’s economic agenda.






All told, while we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.








In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18:


Keep the questions coming,




Darius Dale

Associate: Macro Team

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

[video] $PBPB: Why Potbelly Is Still 'Wildly' Overvalued


In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance




  • BETTER - MGM China was a bit better than projected and much better than expected when the quarter began.  Las Vegas performed in-line.  Q1 commentary was, as expected, positive with RevPAR guidance at +10%.  We did sense some uncertainty with regards to trends for the remaining 3 quarters of the year and limited visibility.



MGM 4Q 2013 REPORT CARD - mgm



  • WORSE:  Project cost increased to $2.9 billion due to redesign of entertainment options.  Remains on track for early 2016 opening.
  • PREVIOUSLY:  Remain on track for an early 2016 opening...budget is still standing at $2.6 billion.


  • BETTER:  4Q Strip REVPAR was 1% - slightly higher than projected.  1Q REVPAR growth expected at 10%.  1Q convention mix: 22% (near peak levels).  For FY 2014, 15.5%-16% mix (near peak levels).
  • PREVIOUSLY:  4Q room revenue to be up slightly year-over-year on relatively flat RevPAR with accelerating trends in the first quarter. In fact, looking into next year, 1Q convention trends are looking exceptionally strong. Are approaching peak convention mix in 1Q with an expected 21% convention room mix and beyond 1Q, expect an increase in convention room mix for all quarters throughout the year.


  • BETTER:  VIP RC increased 32% YoY.  MGM continues to maximize table productivity.
    • Still see opportunities for continued improvement in yield on the VIP tables to maximize profitability from this segment
    • In the process of upgrading main floor and enhancing our product offerings to drive future growth. Remodeling includes renovation and expansion of the Supreme Lounge which has been very successful...expect this to be completed in 2014. The Supreme Lounge is an exclusive area dedicated to high-margin premium mass market customers. 


  • BETTER:  Slot volumes grew 16% in 4Q 2013, compared with 10% growth in 3Q.
  • PREVIOUSLY:  Slot business, overall, has seen some flattening in the market. Even though there's good growth across the market, the growth rates have slowed a little bit.


  • SAME:  Strip flow-through hit 70% in 4Q.  But if you adjust out certain one-time items (e.g. vacation accrual policy), it is within that 50%-60% range.
    • Goal has been in the 60% range on a long-term basis. And that's extremely achievable.
    • Any ADR increase obviously will always go to the bottom line. And then in general, as the convention mix improves and the catering improves, that's a higher-margin business than normal food and beverage business. Hopefully, with the increased visitation, it will increase the occupancy in the shows, which also goes all to bottom line because those are just empty seats if they're not being filled right now. So the flow-through next year should be as strong if not stronger than what we've seen this year.



  • SAME:  Dialogue continuing.  In 1H 2014, MGM will be back in front of NJ DGE commission. 
  • PREVIOUSLY:  First goal is to be relicensed in the state. No reason to expect MGM won't be relicensed there.


In preparation for MAR's FQ4 2013 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.




  • Occupancy rates at MAR hotels are nearly at record levels in North America, well ahead of industry averages.


  • Transient business benefited from improving mix as high-rated retail business was very strong.
  • Looking to shift more and more of that transient business towards higher-rated segments in the hotels


  • North America Group revenue pace for the Marriott brand for the fourth quarter is up nearly 7% due to a strong short-term booking.
  • 2014 group booking pace for the North American company-operated Marriott-branded hotels is currently up 4% to 5%
    • 4% or plus 4.5% for next year is overwhelmingly volume, not rate. Rate is up very modestly, 1-ish% or 0% to 1%.
  • Seeing more corporate business such as training meetings and new product launches.
  • 60% of 2014 group business is already on the books
  • Expect system-wide RevPAR at North American hotels will likely increase at a 4% to 6% rate in 2014, with the improvement largely coming from rate.
  • Smaller the group, probably the stronger, but seeing improvements really in all segments


  • Weak government demand. RevPAR in downtown D.C. declined about 1.5% while RevPAR at MAR hotels across the greater Washington market declined 6%.


  • In Europe, 4Q RevPAR growth should improve as comparisons get easier in the U.K.
  • In Europe, strong performance in Eastern Europe offset declines in London, enabling +2% RevPAR. 
  • Constant-dollar RevPAR to increase at a low single-digit rate at our European hotels in 2014


  • Modeling a mid-single digit RevPAR growth for 2014 on easy comps
  • Constant-dollar RevPAR in the Middle East will likely remain challenged. 
  • Unrest in Egypt reduced RevPAR in the Middle East by 3%.


  • 2014 constant-dollar RevPAR in the Caribbean and Latin America market to grow at a mid-single-digit rate.
  • Favorable leisure demand drove RevPAR up 7% as greater numbers of groups and leisure travelers enjoyed the resorts in Cancun.


  • Expect mid-single-digit constant-dollar REVPAR in 2014, constrained a bit by recent supply growth


  • Expect roughly 100 basis points of margin improvement for the full year.


  • 4Q North America RevPAR to increase 4.5% to 5.5%.


  • Expect very strong performance at our hotels in New York, Boston, San Antonio, and New Orleans and expect more hotels globally will be paying incentive fees during the year.


  • Expect G&A spending to grow more slowly in 2014.


  • Expect to return roughly $1 billion to shareholders through share repurchases and dividends in 2013 and expect to continue to repurchase shares in 2014.


  • There's no real change in trend lines on attritions or cancellations. Obviously, in the Washington market the whole government shutdown had some impact.

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