McCullough Discusses Goldman, Financial Regulation


Slot guys can do little wrong in the eyes of investors.  It probably makes sense.  Who cares about this quarter?



BYI is up 7% since April 5th which is pretty good. Considering that the company punted pretty badly on April 6th, that is a pretty remarkable performance. This just goes to show you how much the institutions want to own this sector and for good reason. IGT reported a low quality quarter and, as we suspected, the stock rocketed higher. In sympathy, BYI appreciated over 5% on the day.


So what should we expect on Thursday night?  We actually feel better about their quarter post the IGT call. Generally there shouldn’t be a lot of surprises since they already pre-announced… but of course the magic is where the shortfall comes from. Market share probably dipped – Konami may have shipped 2,500 units this quarter – and probably will stay low for another couple of quarters. We are getting positive feedback from BYI’s new games but it will take a bit of time before they show up materially in the numbers.


We’re at $0.53 for the quarter, including Rainbow, since it’s technically not discontinued until next quarter, and in-line with consensus at $0.58 for the June quarter. However, we are above consensus for FY2011. Below are the details: 

  • Product sales of $72.5MM with a gross margin of 50%
    • 3K machines shipped to NA, comprising of 2,600 replacement units and 400 new units
    • 1,500 international shipments
    • $14.5K ASP’s
    • $7.4MM of “other product sales”
  • Systems sales of $52.5MM at a 74% margin
    • We know that the Marina Bay Sands revenues won’t be booked until the June quarter
    • We suspect margins should be higher than usual since revenues should be heavily weighted towards software vs. new system installs
  • Gaming operations revenue of $66MM with margins at 72%
    • Normally March is a seasonally better quarter than December, however, we know this quarter and the next several will be impacted by the removal of the Alabama units
    • We estimate a $3MM revenue impact from Alabama this quarter and a $4.8MM impact for the June quarter
  • Other stuff:
    • SG&A of $52.5MM
    • R&D of $20MM
    • Net interest expense of $2.5MM, which will step down next quarter and going forward since interest on the R/C steps down 50 bps and BYI will have $80MM more of cash on hand, barring a stock buyback
    • D&A of $5.9MM
    • Tax rate of 35%

The Week Ahead

The Economic Data calendar for the week of the 26th of April through the 30th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

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Bond Bubble?

Andrew Mellon, the banking icon, once famously said: “Gentlemen prefer bonds.”  The implication of this statement was likely that bonds, while less sexy than equities, will generate a predictable return for investors, and not put their investments at serious risk of capital impairment.  Ostensibly the latter part is true since bonds sit higher up in the capital structure and therefore have inherently more downside protection.


Asset allocation decisions are made based on a multitude of factors.  The correct allocation with the appropriate timing can ensure both capital preservation and capital growth for investors.  In the construction of a diversified portfolio, a critical decision relates to the appropriate percentage of allocation to bonds versus equities, and versus other asset classes of course.


Investors have effectively three choices as it relates to bond, or fixed income, allocation: government bonds (all levels of government), investment grade bonds, and junk bonds. In theory, the credit worthiness occurs in that order as well, and yields inversely reflect credit worthiness.  So government bonds will have lower yields than similar duration corporate bonds, and vice versa.


According to the Investment Company Institute, investors have poured almost $400 billion into bond funds since the start of 2009 and in aggregate there is more than $2.2 trillion invested in bond funds. As a result of this massive inflow of money into bond funds and the government’s purchase of government bonds as part of its quantitative easing program, yields in the bond market have come down substantially since the credit crisis of late 2008.  So, given the massive inflow into bond funds over the past, the question remains: are we in a bond bubble?


The answer is nuanced.  From a longer term perspective, bonds are, broadly speaking, at near all-time lows in yield. In particular, given the current loose monetary policy being implemented by the Federal Reserve, Treasury bonds are at close to all time lows in yield, and therefore highs in price.  Given this extreme in Treasury bond pricing, there is clearly bubble potential in the U.S. government bond market.


A quick Google search of “Bond Bubble” indicates that pundits have been suggesting bonds are in a bubble very consistently for the past three years. While it is easy to make a call that an asset class is in a bubble, it is more difficult to be accountable to the timing of such a call.  In addition, a bubble inherently implies that the unwinding of that bubble will be a crash.  So far the pundits have been wrong both counts.


We’ve charted the spread of corporate junk bonds bond versus 5-year treasuries and corporate investment grade bonds versus 5-year treasuries going back to 2002 (which is the inception of the Bloomberg bond indices). Interestingly, while yields for both investment grades and junk bonds are close to their lows in yield for this period, currently at 8.24% versus their low of 7.75% for junk bonds and 4.7% versus their all time low of 4.5% for investment grades, the spreads between 5-year treasuries remains relatively wide.  In fact, these spreads bottomed in 2007 at 0.93% for investment grade and 3.1% for junk, versus their current spreads of 2.30% and 5.74%, respectively.


Since the price of bonds should never be taken in isolation, if there is a bubble in bonds, it is likely related to Treasuries.  The case for the Treasury bubble is effectively three fold.  First, as mentioned, they are being priced based on extreme monetary policy that will not be sustained in perpetuity.  Second, they are incorporating very limited expectations for inflation, which we believe will occur and perhaps in dramatic fashion.  Finally, government bonds will eventually have to reflect the declining credit worthiness of the Unites State based on the United States’ deficit as a percentage of GDP and growing debt to GDP ratios.


Treasury bonds cannot stay at their current yield level forever.  And while we have seen some correction, yields and prices for U.S. government bonds are still at generational extremes.  In reality, though, just as it took decades for interest rates to come down from the meteoric highs of the 1980s, it will take interest rates time to go up, and it is likely that no crash is imminent. This move will be long and sustained.


From an investment perspective, the most effective way to play the re-pricing of Treasuries over time is to be short Treasuries out right, or to play a narrowing of the spread between treasuries and corporate bonds.


The reality is, gentleman only prefer bonds at the right price.


Daryl G. Jones

Managing Director


Bond Bubble? - hy





Malaysia’s consumer prices climbed 1.3% year-over-year in March, after gaining 1.2% in February.  The FTSE Bursa Malaysia Index traded flat last night and is up 5% year-to-date.  Consistent with inflation trends across Asia, most Asian central banks are starting to remove the emergency monetary stimulus implemented last year as inflation returns with stronger regional economic growth. 


India has raised interest rates twice since Malaysia increased borrowing costs on March 4, and Singapore said this month that it will allow its currency to strengthen.


One of our most admired central bankers, Australia’s Glenn Stevens, takes the prize for the most aggressive round of interest-rate increases and he is balancing the risk of faster inflation against a growing economy.  In a speech overnight he said “Our task is now to manage a new economic upswing and this will be just as challenging, in its own way, as managing the downturn.”   The central bank’s next meeting is in early May.  Next week’s reading on first-quarter inflation will have a big impact on the direction of interest rates in Australia.  Last night, the Australian Index was down 0.5% and is marginally higher on the year. 


Howard Penney
Managing Director




MPEL should beat the Street slightly, and 2010 numbers look like they need to go higher



MPEL is reporting next Wednesday before the market open, and they should report a solid quarter. We think MPEL will beat the street's estimate of $91MM of EBITDA by $4MM. This should be the first quarter where neither property has 'hold' issues, so there should be a good read through on what normal operating costs and business leverage look like. If CoD can keep ramping and if Altira stabilizes, then MPEL should handily beat Street numbers and will likely prove to be the cheapest way to play Macau out of all the US listed companies.


For those of you that like the details on our assumptions, please see below.


City of Dreams

  • Net revenue of $347MM 
  • EBITDA of $68MM 
  • RC volume of $10.4BN and 2.9% hold 
  • Mass win of $103MM 
  • Slot win of $24MM
  • Net casino revenues of $335MM, $30MM of non-gaming revenues and $18MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $213MM, $11MM of non-gaming related costs, and $55MM of fixed costs (fixed costs were $53MM last quarter)


  • Net revenue of $198MM 
  • EBITDA of $20MM 
  • RC volume of $9.8BN and 2.8% hold 
  • Mass win of $13MM 
  • Net casino revenues of $200MM, $9MM of non-gaming revenues and $10MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $153MM, $3MM of non-gaming related costs, and $23MM of fixed costs

Mocha Slots

  • Net revenue of $27MM 
  • EBITDA loss of $7MM


  • Net interest expense of $19MM (compared to guidance of $20MM)
  • D&A of $75MM, including amortization of the gaming concession and land use rights (in line with guidance)
  • Pre-opening expenses of $5MM

4Q09 YouTUBE

  • “Going forward into 2010, I believe our business is in its best shape yet. We are on a solid positive trajectory with significantly improved mass market trends at City of Dreams and a return to strong rolling chip levels under a more profitable commission environment at Altira.”
  • "I’m confident that 2010 will be a great year for us particular given the positive economic outlook in China, the strong political support from both the Macau SAR and the central government and also the geographic advantage that Macau enjoys."
  • “Rolling chip levels have since rebounded and in January, Altira Macau generated 30 billion of turnover exceeding the average monthly load of 25 billion during 2009. Altira Macau earned over US$10 million dollar of EBITDA in the month of January 2010, our best monthly performance of this property since October 2008.”
  • “Now on to City of Dreams, mass market table drop was essentially flat between October and the seasonally weaker November last year. Drop volume improved by 14% sequentially into December breaking a US $150 million for the first time. The performance of our mass market business steps up again in January of this year. Mass table drop increased 11% sequentially from December to over 170 million for the month and mass table revenue increased 20% sequentially to approximately US $31 million. This is translated into improved profitability at City of Dreams. We generated over US$30 million in EBITDA in January of this year.”
  • “We expect to see continued improvement as occupancy at Grand Hyatt approaches to 90% plus levels, which we consistently achieve at Crown and Hard Rock.”
  • “If we normalize fourth quarter EBITDA using 2.85%, the midpoint of the commonly expected VIP home range, we would have reported US$56 million of adjusted EBITDA.”
  • “Guidance on non-operating line items for the first quarter of 2010. Depreciation and amortization cost is expected to be approximately US$75m. Net interest expense in the first quarter is expected to be approximately US$20m. Pre-opening expense will be approximately US$5 million, related entirely to the ongoing pre-production of our House of Dancing Water Theater show which will open to the public in about six months from now.”
  • “City of Dreams has got about 20% of its business being done direct.”

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%