Bullish Breakout . . . In the U.S. Deficit

Conclusion:  The Federal Government released their budget numbers for January, and we continue to see expansion towards an all time high in the U.S. budget deficit.  The federal budget deficit is now expected to be $1.65 trillion for fiscal year 2011.


Position: Short Municipal Bonds via the etf MUB


The Treasury Department released its budget statement for the first four months of the fiscal year late last week and the results were indicative of a widening U.S. budget deficit.  In conjunction with this release, the White House took up its deficit estimates for fiscal year 2011 to ~-$1.65 trillion.  This puts the federal deficit squarely in the red zone of budget deficit-to-GDP of -10%.  In fact, based on our math and using the White House’s deficit projection for fiscal year 2011, budget deficit-to-GDP should be ~-10.9%, which is the highest level we’ve seen since World War II.


In the table below, we’ve compared key line items for the first four months of this fiscal year and the first four months of last fiscal year.  As always, we have normalized for TARP and 1-time payments.   There are a few year-over-year trends to highlight, which include:

  • On the outlays (or expenditures) side, Medicaid was up +7.9% and Net Interest on Public Debt was up +9.6%.  The latter point will be even more critical as debt expands to fund future deficits and interest rates continues to climb; 
  • The key positive for expenditures was  the decline in unemployment insurance payments, which declined (18.2%) year-over-year (albeit the savings was small relative to the entire deficit); and 
  • The primary positive change on the revenue side of the ledger was a +23.2% increase year-over-year on individual income tax revenue, which amounted to a net positive contribution of $72 billion for the period. 

Bullish Breakout . . . In the U.S. Deficit - 2


In aggregate, government outlays continue to accelerate, as they were up +6.6% on a year-over-year basis.  While revenues also expanded (up a healthy +9.4%, driven primarily by individual income tax receipts), it was not large enough growth from the smaller revenue base to narrow the year-over year budget deficit, which was up +1.9% to -$422 billion for the first four months of the fiscal year.


As we outlined in our conference call last week,Mayhem in Muni Bond Land,” one of our key short ideas as it relates to the burgeoning U.S. federal budget deficit are municipal bonds as an asset class.  The key implication of a larger-than-expected federal budget deficit is that there is less money available to offset state and local level budget deficits, which will require state and local governments to issue more debt to fund their operating budgets and capital expenditures.


The other key issue to consider is that as the federal budget deficit increases, the future supply of U.S. Treasuries will increase as well.  Naturally, a larger supply of Treasuries to be issued should demand a higher interest rate.  Since municipal debt, as outlined in the chart below, tracks the yields of U.S. Treasuries very closely, increasing supply in the Treasury market (and likely increasing yields) will be negative for the municipal debt market as well.


The last interesting point we wanted to highlight from the budget report relates to foreign aid.  According to the CBO:


“Those increases were partially offset by several large decreases, including a reduction of $2.4 billion in outlays for international security assistance, reflecting a delay in making most of the $3 billion in annual payments to Egypt and Israel for military aid.”


It is interesting to note the scale of these security payments, as well as the actual levers that the U.S. government can pull by delaying these payments.


Daryl G. Jones

Managing Director


Bullish Breakout . . . In the U.S. Deficit - 1


Not good enough to declare a Las Vegas recovery. Q1 should be better and MGM will make the rounds to make sure everyone knows it.



“2010 has been a transformational year for MGM Resorts International from a balance sheet and liquidity perspective.  We have built the foundation needed to benefit from an economic recovery.... We are encouraged in early 2011 by the level of business activity we are seeing.  Our forward booking pace is currently ahead of last year led by a stronger convention mix which we believe will position our Company to have a better year than last.”

- Jim Murren, MGM Resorts International Chairman and CEO



  • Adjusted Wholly Owned Property level EBITDA of $267MM
  • MGM Macau EBITDA of $142MM
  • CityCenter Adjusted EBITDA of $36MM, however, if you exclude the condo revenues and forfeiture revenues the clean number is really only $16MM
  • "The Company received approximately $192 million from MGM Macau, which represents a full repayment of the Company’s interest and non-interest bearing notes to the joint venture."
  • "MGM Macau, which is 50% owned by the Company, entered into a new $950 million senior secured credit facility in August 2010"
  • "CityCenter Holdings LLC, which is also 50% owned by the Company, recently extended the maturity of $500 million of its credit facility and raised $1.5 billion of senior secured first lien and second lien notes."
  • "Slots revenue increasing 2% and table games revenue down 11%.  The Company’s table games volume decreased 13%.  The overall table games hold percentage was slightly lower in 2010 than the prior year quarter and was near the low end of the Company’s normal range."
  • "Rooms revenue decreased 5% from the prior year, excluding the impact of resort fees. Las Vegas Strip occupancy decreased from 86% to 84%, and ADR was $110, consistent with the prior year quarter; REVPAR (2) decreased 2%.  If resort fees were included, rooms revenue and REVPAR would have been up 1% and 2%, respectively."


  • Off to a good start in 2011
  • LVCVA is predicting a 3% increase in visitation and Murren believes that there is upside to that number given strength in convention bookings
  • CNY has seen very strong volumes. Flew about 15% more customers into Las Vegas. All of their suite product has been fully occupied over the last week with high value guests.
  • In Jan, they were able to improve their convention mix by 4%. Convention segment has a $50-70 ADR spread over leisure.
  • Have 1.6MM convention room nights on the books for 2011 which is a double digit lift over last year.
  • Expect to see their overall convention mix about 14% of the business in 2011
    • Mix of their luxury properties is north of 20% 
    • Believe that RevPAR will be up all year in 2011
    • Seeing improvement in customer spend per visit at luxury properties
  • January was a great month for City Center with strong profitability in all elements of the property
  • In Macau, they have more improvements to come in 2011. Main floor volumes were up 25% YoY, VIP volumes were up 80% and slot handle was up over 50%. Added some new junkets in the 4Q.
    • Expect to add more room operators in 2011
    • CNY volumes are up significantly YoY
  • Working on their proposed MGM Macau IPO - in their quiet period now but moving along
  • M Life was launched in Vegas in Jan and regionally in 4Q10. Already seeing a lift in business as a result. Will help them cross market better and increase frequency of visitation.
  • Borgata: NJ trust received $74MM of proceeds in 4Q, including the $71MM related to the sale of their long term land leases and real estate parcels. Trust balance is $188MM - $150MM of which is invested in treasuries and included in pre-paid assets on the balance sheet. Continuing to negotiate with purchaser on Borgata.
  • Believe that they will remain in compliance with their leverage covenants
  • Partners contributed $73MM of equity contributions - interest reserve of $150MM covering about 18 months of the financing for City Center first lein notes. No financial covenants during the interest reserve period.
  • 1Q2011 Guidance:
    • Stock comp: $9-10MM
    • D&A - $160-165MM
    • Gross interest expense: $260-270MM (No Cap Interest)
  • Gross interest expense: $249MM was cash interest in the 4Q
  • Will include resort revenues in 1Q in their ADRs - believe that RevPAR will be up at least 10%
  • Expect to spend $250-275MM in capex in 2011 - mostly refurbishments and slot upgrades. Spent $208MM in 2010. 4Q capex was $76MM
  • Aria update:
    • $99MM in 4Q casino revenues, $225MM in 2H2010 compared to $125MM in 1H2010
    • 23% of strip baccarat share
    • October, Aria introduced a remodel, high-limit slot area. As a result, Aria experienced the highest quarterly slot volume since opening
    • $139MM of non-casino revenue due to higher ADR at Aria in 4Q
    • 170k room nights on the books for 2011 - which should help them yield up their rates
    • Saw a noticeable increase in foot traffic since opening of Cosmo and the footbridge
    • FTEs at low of the year - 4% below the 3Q10
    • In March they are opening the Market Cafe in Vdara
    • By March 82% of the leasable space will be open at Crystals
    • 436 condos sold in total to date. In 4Q they closed on 26 units (including 1 at Mandarin) for $19MM 
      • 61 Mandarin
      • 219 Veer
      • 156 at Vdara
    • In September 2010 we commenced our CityCenter leasing program. To date we've leased 39 units at Mandarin Oriental and another 46 units in the Veer Towers.


  • Table game volumes down 13% in 4Q10
    • We're as active on the event side this quarter which will change this year
    • Hold impact also impacted them...
      • That makes no sense - hold doesn't really impact volume
  • Convention volumes were up 11% in January which led to a teens increase in RevPAR for them. Have several several large events coming up as well.
  • Trends in RevPAR by month and how about the second quarter?
    • Seasonally, they do better in 1Q than 2Q because 2Q isn't as strong of a convention quarter. But believe that they will have good pricing strength in 2Q - they will have good events and should have good FIT business
    • Resort fees are clearly working - instituted in late 2009. RevPAR would have been up 2% in 4Q if included
    • Operating leverage is significant with their number of rooms
  • Mix in 4Q10 - why was occupancy down (different from some of their competitors)?
    • October was a very strong month mix wise - drove good pricing. Nov & Dec they didn't have much convention business
  • Moving along with IPO in Macau but can't give details
  • The junket operators (Star888) didn't go out of business at MGM Macau. They were and are reserved for customers losses.
  • What would the YoY change in RevPAR be, ex resort fee?
    • Up at least in the high single digits
  • January detail on CC - was it great for everyone else?
    • All the enterprises made money - $18-19MM of profits.
  • M Life stats?
    • Had 700,000 enrollments since the launch - roughly 150k were re-engaged (i.e. not played in a year)
    • Seeing good casino spend in MS and Detroit
    • Early results in Vegas are just on the enrollment side but its really early. Effort on educating customers on M Life
  • Are able to keep their expenses in check - in the middle of union contract - so low single digit increases. Most expenses will rise low single digits ex FTE changes
  • Booking window is widening, but they are still getting a lot of in the year for the bookings in Las Vegas convention business. 
  • YoY margins are most of their properties were down?
    • Because revenues were down and rate was challenged
    • Promo expenses are down YoY
    • Primarily a hold related issue and other revenues are also struggling
  • Net Revenue in Macau?
    • $580MM net revenues, 24-25% margins; for the year, 22-23% margins
  • Convention forecast is 14.5% for Aria.. the 14% excludes Aria
  • IL - not sure what will happen in that market
  • Perini? They are under a stay by the Supreme Court - waiting final determination on a writ they have before the state Supreme Court.
  • Are the mid-tier properties core?
    • Clear to them that there is great potential to increase cross marketing between their regional properties and their properties in Las Vegas
    • Expect them to have a broader reach in the regional properties - through negotiating deals with other regional operators about increasing the reach of their database. Highly unlikely that they would divest those properties. This year, they will be able to announce several JV cross marketing deals to help their LV operations.
    • We think a deal with ASCA would make a lot of sense

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European Bank Swaps Mixed

Conclusion: Risk widens for Spanish banks and compresses for Greek Banks week-over-week.


Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was mixed, widening for 20 of the 39 reference entities and tightening for 19. Importantly, we highlight tightening in CDS for main Greek banks and widening in Spanish banks w/w.


Our attention remains acutely on the health of each of the PIIGS due to their volatility and contagion effect across the continent. As a point of reference, foreign exposures to Spanish banks are 4x higher than to Greek banks, or $989.8 Billion versus $252.1 Billion, according to the latest data from the Bank of International Settlements.


We closed out of our short position in Italy today with the Italian etf EWI immediate-term TRADE oversold.  We remain bearish on Italy's fiscal positioning for the intermediate-term TREND, and we'll look to re-short on strength.


We remain long Sweden (EWD) and short the Euro (FXE) in the Hedgeye Portfolio with the EUR-USD oversold in a trading range of $1.34-$1.36. The EUR-USD partially took a hit today on news that Germany’s West LB bank failed to reach an agreement on a restructuring model as Germany looks to sell the lender by year-end under conditions imposed by the European Commission.


Matthew Hedrick



European Bank Swaps Mixed - B1

European Bank Swaps Mixed - B2


In preparation for MAR’s Q4 earnings release this afternoon, we’ve put together the pertinent forward looking commentary from MAR’s Q3 earnings call and subsequent conferences.



Post Earnings Conference Commentary

  • [Autograph Collection] “We already have 12 hotels signed. We could have as many as 20 by the end of the year open, and we’re talking to 40 to 50 different developers and owners right now, owner-operators, about opportunities.”
  • [Cosmo] “Our newest edition to the Autograph Collection will be 2,000 rooms opening on December 15th, with another 1,000 rooms opening June, 2011; 150,000 square feet of meeting space right on the strip. We’re very excited about the hotel.”
  • “And the whole idea of buying hotels is to reposition those hotels, and then flip and sell those hotels, so at given time, we may own a dozen or a half dozen hotels. Right now out of our 3,400 hotels around the world that carry our brand we own six, so you could see it’s not a big investment from US.”
  • “We want to maintain about a 3 times debt to EBITDAR ratio as we continue to grow, so maintaining that rate keeps us at a solid BBB rating, which is important to us. And as a result of that, given the growth in our business, we will continue to borrow up about $1 billion to $2 billion worth of debt to maintain those ratios. We’re anticipating about $1 billion of that will be in the form of commercial paper. We’re a net borrower company.”
  • “So our adjusted earnings per share from continuing operations over that three year, well, depending on which growth assumption you make, 5, 7 or 9, our EPS could range between $1.90 and $2.75 or 20% to 36% compounded annual growth rate through the 2010 levels.”
  • “We’re right in the middle of doing all our budgets right now, but you would imagine based on, as you said, Europe is going to be a little lighter than the U.S., Asia, and the Middle East – Asia is going to be much higher. I mean, you can think about what’s going on around the world, and we think those trends will continue into ‘11”
  • [RevPar composition] “I think you’re going to see right now probably maybe 50-50 rate occupancy.”
  • “Current trends would tell you that ‘11 should be a better booking pace than ‘10 was, as you look at the booking pace as the economy continues to grow.”
  • Cancellations are way down, slippage is way down and attrition is way down.”
  • “Limited service hotels are likely to recover more slowly than full service hotels. In 2010, only 5% of our more than 450 company operated limited service hotels are expected to pay incentive fees.”
  • “So all-in-all, we expect international incentive fees to grow by 18% to 27% compounded. Putting it all together, incentive fees could increase 18% to 36% compounded, with growth coming from improving net house profit, hotels achieving owner priority and unit growth.”


Q3 Conference Call:

  • “We are forecasting global REVPAR to increase 6% to 8% in both the fourth quarter and full year 2011. We expect to see considerable in the year, for the year group bookings in 2011 with better pricing. We also expect next year’s special corporate rates to increase at a high single digit rate, reflecting the impact of both higher prices and the impact of mix. Growth in catering revenue is expected to recover more slowly. Fee revenue is projected to total $1.29 billion to $1.33 billion as we are likely to open another 25 to 30,000 rooms in 2011. Owned, leased, corporate housing and other revenue net of the related direct expenses could increase 5 to 15%, due to improving REVPAR and margin.  We assume Timeshare contract sales to be flattish to 2010 results and expect G&A expenses to increase 3 to 5%, reflecting increased spending for brand initiatives and compensation. All in all, both our 2011 cash flow and growing debt capacity provide substantial investment capacity next year. As we consider investments, our priority is to first, invest in our business and then return excess cash to our shareholders through dividends and share repurchases.
  • “The recovery is here and we’re doing things differently. First, we’re reducing discounting and improving our mix. And we’re raising room rates.”
  • [Corporate G&A] “There isn’t much more to cut but we continue to look for ways of doing things more efficiently.”
  • “We expect the Timeshare business to generate about $175 million in cash after all investing activities and to produce even more cash flow in 2011.”
  • [FY 2010] “Capex spending of about $500 million.”
  • [1% change in RevPar sensitivity] “I think you could use 15 million [for fees] for 2011. And then about 5 million for owned, leased and other.”
  • “I think, we don’t expect to see any deterioration in margins, in fact, we would expect that to expand as our margins expand, so our owned, leased properties would benefit from the REVPAR increase as well as the margin expansion.”
  • [2011 RevPar growth mix] "Mostly rate"
  • “I think healthcare costs will be up in the high single digits for us next year. Hopefully, that’s more in the 6 to 7% range than higher than that, we’re obviously not done with that. I think that rolling into cash compensation will make comp growth the largest driver of that 3 to 5% increased comp growth, meaning for our current group of associates around the world.”
  • [Nights on the books for 2011 compared to nights on the books for 2010 for same period] “Probably a little bit lower than where we were this time last year but one of the things we’re seeing is a lot of what you call in the year, for the year, in the quarter, for the quarter. And so when you look at ‘10, when we look the ‘10 compared to ‘09, we saw a real build-up as Arne mentioned in his comments where we started the year down like 5% and right now we’re up 1% for 2010 pace, a six point jump and you would expect ‘11 to be that way too with a lot of in the year for the year.”
  • “I think the revenue we’ve got on the books for next year for group business is all U.S. numbers, is down a little bit less than 2% from where it was at the same time last year for 2010.”
  • “We are seeing the lenders starting to get a little more active out there. Obviously, the leverage ratios are a lot lower than what they were, the time periods are probably a little shorter and you’re seeing a lot of personal guarantees by the developers, especially on our limited service side to enhance lines.  We will continue to invest in our business in the form of mezz loans or guarantees or even outright purchases.”
  • “We also have some gains in the fourth quarter that we put in, so we moved our guidance up a couple pennies for the full year because of the gains that you see in the fourth quarter.”
  • “We will see that the government contribution in REVPAR is actually negative because their approach to rate and compounded with the effect on government volume which will tend to get yielded out a little bit will make government a negative number in terms of the total REVPAR contribution. But both volume and rate on special corporate should more than offset that. And so it varies a little bit segment to segment. The discounted stuff may also be negative next year. So that’s packaged stuff, it’s stuff sold through the opaque channels online, some of those sorts of things and that too will get offset by the stronger performance in both group and in business travel.”


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