Big mismatch between numbers and conference call propaganda. Aside from Macau cost cutting, the numbers were disappointing. In fairness, expectations probably got out of whack following the huge stock run.


The LVS results released after the close were disappointing.  In fairness, the stock has been on a tear and whisper expectations had been ratcheted up.  However, since Sheldon was out and about touting how strong results were for his properties and dressing his Macau operations for an IPO, LVS should’ve done better.  At least we figured out the mystery of why WYNN scrambled to report its numbers first.

LVS's discussion of its options and strategy sounded completely unrealistic to us.  I kept looking back at the numbers and double checking that I wasn’t dialled into the GXDX call by accident last night (our healthcare guy Tom Tobin nailed this one last night).  I don’t think Sheldon pulled the wool over anyone’s eyes by proclaiming that he can actually sell his real estate assets.  That story is a rerun of a rerun of a rerun.  While the strategy of selling non-core assets worked when the real estate market was booming, we seriously doubt we will see any deals, particularly as Sheldon put it, at “exaggerated prices”.  Repeating a lie over and over may work in the political spectrum, but not when it comes to the real estate market. 

With the stock up here the trade has played out.  Our intermediate and longer term concerns are now in focus.  Those concerns do not include covenant issues, however.  We still believe that Sheldon will get his amendment in Macau and resolve his credit issues in the US (See “LVS: CHINA FORCING THE ISSUE” from 7/17/09).  That is still a potential positive catalyst since there is much doubt in the investment community.  Rather, in our view the real issues are:

  • A 25% increase in Mass table supply in Macau (“BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE” from 7/5/09)
  • The worsening supply/demand situation on the Strip (PLENTY OF ROOMS AVAILABLE AT THE STRIP INN IN 2010, 7/17/09)
  • Overblown excitement about commission caps (COTAI COMMISSION CAPS, 7/16/09)

Please read on for details of the quarter and conference call:


Las Vegas Operations

Revenues came in 21MM below our estimate and EBITDA was 19MM below our expectations.  Our lofty expectations were based on the expected ramp of Palazzo and the relatively easy comps for Venetian, which was hit pretty hard in 2008 when Palazzo opened.

We’re not sure what Sheldon was referring to on the call when he spoke about how he’s holding rate and his properties are differentiated and therefore are faring better.  RevPAR at Venetian was down 25%, led by 24% ADR decreases.  However occupancy held up pretty well, so I suppose that’s what he meant when he said filling the rooms wasn’t an issue; it was simply a matter of rate.  Room revenues were $5.6MM light of our estimate due to the lower ADR.

We were also confused when LVS said it felt good about the slot business despite a decline of 27% in slot handle at both properties.  Slot hold was a little high and table win % was a little light.  We think that the Venetian suffered from low win % in the 13% range, while Palazzo experience high win % in the range of 24%. Net/net, gross casino revenues missed our number by $15MM.

Food and Beverage, retail, and other was 8MM below our estimate... lower rates attract lower end customers.

We expected operating expenses to be down materially and they actually came in $2MM below our number. While LVS gives very little detail around its cost cuts, we think that fixed costs decreased 12% y-o-y. 

Sands Macau

Sands Macau was the only property in LVS’s portfolio that beat our EBITDA expectation.  Of course, Oceanus will be a major impediment to this happening again.  Our estimate was $50MM, while Sands reported $61M of EBITDA for the quarter.   One thing to keep in mind for Sands Macau is that like Venetian Las Vegas, this property was hit pretty hard last year as Venetian Macau ramped and cannibalized some its customer base.

  • Slot hand grew an impressive 15% y-o-y (2Q08 was down 18% though) and slot hold was high at 8.1%, contributing an extra $2.5MM of EBITDA
  • Once again Sands reduced its table count, we suspect on the Mass side, by 36 tables sequentially and by 170 tables y-o-y.  We estimate that there were 317 tables on average at the Sands... as a reminder, at one point this property had over 700 mass tables.  This is certainly one way of reducing costs.
  • We estimate the fixed costs were down $25MM y-o-y to roughly $30MM.  Our best guess is that fixed property expenses will be down to $117MM in 2009 from $190MM in 2008.

Venetian Macau

Despite Sheldon’s commentary on how solid Venetian Macau’s results were, they came in below our revenue and EBITDA estimates.  While LVS may want to blame low hold in its rolling chip business, we believe that the low hold on RC was largely offset by high hold on higher margin Mass business.

  • Once again the number of tables was reduced by 18 sequentially.  We suspect the reductions were at Mass level.  This property originally opened with over 730 mass tables, and now only has 460. 
  • Mass drop was down 10%, but high hold saved the day.  If hold was at the normal 19% level revenues would have been $44MM lower
  • While mass drop was disappointing, VIP rolling chip impressed, flat y-o-y despite a declining market.  However, strong drop was offset by weak hold, impacting revenues by roughly $55MM.
  • Net/net we think the hold issues were a wash this quarter
  • It was harder to figure out cost reductions at this property, but our best guess is that fixed costs were around $70MM for the quarter, down about $15MM sequentially. We have fixed costs at this property down $60MM y-o-y to $300M.

Mental Flexibility

“It's easier to think outside the box if you don't draw one around yourself.”
-Jason Kravitz
One of the hardest things to accomplish as a person is mental flexibility when things go wrong!  Mental flexibility means forgiving yourself for slips, while keeping the mental focus on positive progress – learn from your mistakes because you are going to make them.  Wow, that’s deep for the early morning wake up call, but here we go anyway.  
If you have some degree of mental flexibility, it’s unlikely that you will get overly bent out of shape when things go wrong. One of Keith’s favorite sayings is “when the facts change we will”, which is of course borrowed from Keynes.   Having the mental flexibility to change is a very desirable trait, but it takes a strong discipline and a process to admit that you are wrong.  
As an investor, without the flexibility to change, you put at risk your performance and the ability to recover from mistakes.  As an analyst, the key questions to ask are: Am I able to see things from different perspectives? Can I fully appreciate the viewpoint of others that disagree with me?  “I'm right and you're wrong" - is nothing more than an expression of intolerance and narrow-mindedness - that is a problem.

Having the mental flexibility to be open to new or different ideas allows one to adjust to a changing environment.  Much of the stress we experience in life and in the market is due to the inability to accept change.   Change is both inevitable and the very nature of life. Changing one's mind is not a sign of weakness, but of flexibility and growth. Flexibility also promotes mental and physical health because it frees us from stress, resentment, anger, and fear.  To the flexible person, life is not about survival but about enjoyment.
I know there have been a number of times in my career when a stock was going against me, but I kept making excuses to justify my opinion.  The facts just kept getting in the way!
Keith wrote yesterday “when I made the transition from being wrong on the top end of my Range Rover (954) to calling it for what it was – a confirmed breakout - I started giving you higher-lows of support and higher-highs of resistance.  Now your daily risk management objective is to play the game that you see in front of you.” This is a process that some have criticized as too short-term, but certainly allows for mental flexibility!  
Which leads us to the set up for today; the risk reward for the S&P 500 suggests that there is 1.5% downside and 1% upside.  This is a trading range, with commensurate risk and reward. The levels of immediate term support/resistance for the three key indices are:
1.      SPX = 971-996

2.      COMP = 1

3.      Dow = 9026-9238

I suspect the July rally has caught a number of people flat footed.  I know where I sit; I have not found the mental flexibility to get bullish on my stocks, the restaurant sector.  While I have certain names that I like and dislike, being out right bullish seems counter intuitive to the fundamentals.  But the market seems to be telling me I need to be more flexible and look past next month’s comp number.  I’m working on being more mentally flexible every day.
Function in disaster; finish in style
Howard Penney   


EWG – iShares Germany We bought Germany on 7/28 on a pullback in the etf. Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last three months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP– iShares TIPS
The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

UUP – U.S. Dollar Index – With a +1% move in the USD on 7/29 we shorted the greenback. This is how you earn a return on the socialization of the US Financial system’s risk. We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

XLI – SPDR Industrials – We don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares Italy – Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don’t want to be long of.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY – SPDR Consumer Discretionary – As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

McCullough Interview on Dollar, Stock Strategy

Daily Trading Ranges

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Japanese trade and production data released today showed sequential improvement in June with Production up 2.4% M/M while shipments improved by 3.5% for the month. Total exports showed a sequential improvement on a year-over-year basis but, at -37.78% (SA), external demand for Japanese goods remains weak.

As domestic Japanese investors are focused on the upcoming election and calculating the prospects for the economy under a post-LDP regime there may well be opportunities for optimism. Anticipated new stimulus measures for 2010, implemented either by the presumptive Democratic victors or LDP underdogs, combined with signs of bottoming in production and exports will likely be welcomed as a potential tonic for the current stagnation (regardless of increased debt levels resulting from increased government spending).

Our view is that any recovery for exporters will be more difficult than some anticipate. In the chart below we have illustrated total USD exports from South Korea as a percentage of Japanese exports. If we were to create similar charts for the other regional rival economies the trend would be similar. With proficient quality Korean automotive and industrials, Taiwanese consumer electronics producers and other competitors stealing market share it is presumptuous to expect that Japan can simply reclaim those lost markets simply by waiting for a global recovery.

STILL SINKING - japanab1

We continue to believe that recovery in Japan will lag the other major Asian economies, and that an ultimate day of reckoning will be forced by massive public debt and deteriorating demographics. In the near term, the hollow promises of political candidates and a weak yen are the most likely positive catalysts for Japanese equities in the near term. 

Andrew Barber


Europe on the Scale

Research Edge Position: Long Germany (EWG), Short Italy (EWI)

Today the European Commission reported that European confidence improved to 76 in July from 73.2 in the previous month, confirming the improvement in sentiment across many individual country indices that were released this week and adding a metric to compare the relative health of the region. We continue to hold that European countries will yield uncorrelated returns due to unique underlying fundamentals; we’re currently long Germany via the iShares etf EWG and short Italy via EWI in our model portfolio with the thesis that in aggregate countries with economic leverage will outperform those with financial leverage. [See our recent posts on the portal for more on our fundamental views on Germany and Italy.] 

This week we noted in our post ‘”Shoots” in Europe?’ that PMI improved in the Eurozone for the manufacturing and service industries, and that Germany and France, the region’s two largest economies, registered improved consumer and business confidence numbers in July, with sequential improvement over the last three months. These forward-looking data points from the economic heavyweights are positive as European countries are highly tied to the Union as a main trading partner, yet we still expect slow improvement across the region. It’s worth calling out that European retails sales (a lagging indicator) fell for a 14th month in July. Individually, German retail sales rose, while sales in France and Italy fell, according to Markit Economics. We continue to hold that German and French consumers will benefit from a low CPI/interest rate environment as we move out in the intermediate term, with June CPI at 0.0% in Germany and -0.6% in France, whereas inflation in Italy came in annually at +0.6% in June .

Noteworthy, today Germany released that the number of people out of work increased by 52,000, yet the adjusted jobless rate remained unchanged at 8.3% in July. While we expect this number to push out in the intermediate term, the stability of the number (though lagging) is bullish. As a long term risk we continue to highlight Germany’s depressed export picture, yet an increase in Factory Orders at +4.4% M/M in May and demand from China are early positive indicators. Further, we believe that the country’s powerful manufacturing capacity remains a primary structural advantage when compared to its European peers.  As of late there’s been increased speculation that lending in Germany could tighten as a result of the merger of the country’s big banks, Commerzbank and Dresdner Bank, due to obligations under European state-aid rules to shrink its balance sheet in return for the hand-out it received. We’ve seen no confirmation of this from the Bundesbank.

Our bearish view on Italy remains. Recently the Italian research institute Isae forecast the economy to contract 5.3% this year (matching an estimate by the OECD), from a previous estimate of 2.6%. Fundamentally we believe that Italy’s general government debt, which stands at over 100% of 2008 GDP as compared to 65.9% for Germany and 68.1% for France, will remain a stumbling block to its economic recovery. The spread on 10-year Italian Treasuries versus the German 10Y stands at 83bps, off from a high of 120bps for the month of July, but still suggest a risk aversion from investors.

And finally, UniCredit, Italy’s largest bank, may struggle to see a profit as it works through bad loans, which could have an adverse tail for lending. We’ll know more when the bank reports Q2 earnings on August 4th.  From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%).

As we continue to monitor the European patient we’ll be focused on the individual performance of countries.  For now we’re paired off long Germany, short Italy. 

Matthew Hedrick


Europe on the Scale - euromh



Dirty Harry’s memorable line may be the right question to ask, but it’s not the only one. When it comes to table hold, luck is not the only factor at play.


Lower than normal hold percentage is not always indicative of “bad luck”.  As we wrote in our 09/18/08 post, “HOLD % AS A HEDGE TO DROP IS BREAKING DOWN”, table hold is not a “statistically derived” metric like slot hold percentage.  Drop is the amount of dollars exchanged for chips – it does not account for how much is actually wagered.  When times are tough, players may buy in chips (drop) at the same level but are probably not gambling those chips at the same velocity.  Thus, the denominator (drop) is the same but the numerator (win or revenue) will be lower because the player is not actually gambling as much.

The following chart perfectly illustrates this phenomenon.  WYNN and LVS have both been experiencing declining hold percentages for many quarters now.  The “normal” hold percentage for Wynn’s Las Vegas properties is now looking more like 18-21% and not 21-24% as indicated in the company’s financial reports, including today’s Q2 earnings release.  Absent actual “luck” swings, average hold percentages are likely to stay in the lower range for quite some time.


“DO I FEEL LUCKY?” - wynn hold

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