Holly to Pay $2.9 Billion for Frontier Oil in All-Stock Deal


Raising our February rev target to HK$18-19BN



As a result of very strong volume during the Chinese New Year celebration and surprising follow through in the last week, we are upping our February forecast.  We are now projecting full month total gaming revenue of HK$18.0-19.0 billion (32-40%) versus our previous estimate of HK$17.0-18.0 billion.  Table revenues were HK$14.0 through February 20th implying a surprisingly strong post CNY table revenue per day of HK$609 million.


In terms of market share, MGM had a huge week, pushing its February table share up to 11.1% (it was only 9.4% as of last week), in-line with its 3 month average.  LVS lost a lot of share in the past week, down from 18.3% as of 2/13 to 16.8% through 2/20.




Galaxy slipped further back from its poor showing as of last week and this appears to be a combination of lagging VIP win % and a lack of hotel room capacity to take advantage of the busy period. This will obviously change with the opening of Galaxy Macau.


There have been a few changes to the gaming floors around town the past week.  Sands removed their only Craps tables and the Venetian has increased to 3 craps tables.  Sands are also down 115 slot machines as a large area directly beside the stage is cordoned off and under renovations.


MGM are also down about 80 slots while renovations continue at the back of the casino.  Also being renovated is a VIP room right at the back of the casino beside the entrance from the shopping area.  All tables have been removed and work is in progress.  The Lions bar remains untouched and curtained off.


The renovations at Encore are complete with 4 additional gaming rooms over 4 floors replacing corner suites.  Each room has 6 tables, 4 in the main area and two separate VIP rooms with one table each for a total of 24.


CHART OF THE DAY: Global Inflation Fully Exposed to American Policy



CHART OF THE DAY: Global Inflation Fully Exposed to American Policy -  chart

Early Look

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IF We Debauch

This note was originally published at 8am on February 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are firmly convinced that monetary and fiscal policy will continue to debase the dollar.”

-Ted Kelly (CEO of Liberty Mutual)


Liberty Mutual is an American insurance company that was founded in 1912 and currently sits at #71 on the Fortune 500 list. It has over 45,000 employees servicing global insurance products worldwide and has over $100B in consolidated assets. Their CEO made the aforementioned comment in a Bloomberg article yesterday by Noah Buhayar. No, Liberty didn’t pay me an advertising dollar for this paragraph.


Unlike The Ber-nank attempting to trade US Treasury bonds, this isn’t Ted Kelly’s first rodeo. He’s been CEO of Liberty Mutual since 1998 and his job is to manage bond market and duration risk. On the topic of real-time risk management, he went on to add that, “we are positioning our portfolio and our business to respond if inflation emerges.”


Notice Kelly didn’t say “when inflation emerges.” He said “IF” - and that’s a critical differentiator between a proactive risk manager (a portfolio manager) and a reactive one (a professional politician). Kelly isn’t alone in this line of thinking. Almost every world class risk manager in the world understands that governments that debauch their fiat currencies will impose an inflation tax on their citizenry.


The US Dollar Index backed off hard right where it should have yesterday. It closed down another -0.54%, keeping it below its intermediate-term TREND line of $78.98. Call me lucky or call me right in understanding how to manage risk around the price of the world’s reserve currency. Since starting the Hedgeye Portfolio 3 years ago, I’ve gone 18 for 18 in making profitable long/short calls on the US Dollar (UUP).


I’m not calling this out to pump my own tires. I’m calling this out so that the pundits who are out there cheering on Bernanke’s stock market inflation policy pay attention. Making calls on US Dollar declines helped predict bubbles in both US stocks (2008) and US bonds (2010). Sadly, unless President Obama starts listening to the likes of Ted Kelly, Bill Gross, and Jim Grant, it may very well take another US Dollar currency crisis to stop these Big Keynesian Central Planners in their tracks.


As a reminder, we first made our call on Global Inflation Accelerating in October of 2010, and from here on in we’ll be acutely monitoring the slope of inflation accelerating or decelerating with the following assumptions:

  1. IF we debauch the US Dollar, Global Inflation will accelerate
  2. IF we stabilize the US Dollar, Global Inflation will decelerate

That’s it. That’s the deep simplicity we’ve found in our multi-factor, multi-duration model. Remember, in principle Chaos Theory is grounded in uncertainty – so every risk management exercise starts with IF and every decision follows the THEN that’s driving correlation risk.


On our most immediate-term duration, some of the correlation risk associated with US Dollar Debauchery has burned off in the last 2 weeks. That’s primarily because the US Dollar was UP for the first week out of the last four. IF we debauch it from here, THEN that will change. Correlation risk gets fired up when the Buck Burns.


On the heels of yesterday’s US Dollar decline, here were some important Global Macro reactions to consider:

  1. Commodities – CRB Commodities Index inflated back up to its YTD weekly closing high level of 338
  2. Bond Yields – US Treasury Yields on the short-end of the curve popped back up to +0.84%
  3. Emerging Markets – Asian Equities ended their 3-day rally to lower-highs

Again, this isn’t complicated. Debauched Dollar is bullish for inflation (Commodities) and bearish for Bonds and Emerging Markets…


As you can see in the Hedgeye Portfolio (attached), alongside re-shorting the US Dollar this week, we re-shorted the following Macro positions:

  1. Indian Equities (IFN)
  2. Emerging Market Equities (EEM)
  3. Japanese Equities (EWJ)

Now as sure as the sun rises in the East, you can bet your Madoff that The Ber-nank won’t be talking about the interconnectedness that his Central Planning Policies and a Debauched Dollar have on Asian and Emerging Market currencies and/or their exports.


Let me illustrate this point (generally) with the example of how the USD is affecting South Korea:

  1. South Korean Won strength (born out of US Dollar weakness) = hurts SK Exports (50% of GDP)
  2. South Korean Import Price Inflation zoomed to +14.1% in January vs +12.7% in December = hurts SK Exporter margins
  3. South Korean Equities (KOSPI) have dropped every day this week and are now down -3.6% for 2011 YTD

South Korea’s stock market isn’t what we’d call an “emerging market.” Per capita GDP is 10x that of China and it’s an economy levered to both US Tech and Industrial demand (bearish leading indicators?). Since it’s the world’s 12th largest economy, the KOSPI recently moving to bearish TRADE and TREND in our risk management model is something worth paying attention to as you watch Bernanke and Geithner continue to erode the credibility of America’s currency today.


My immediate term support and resistance lines for the SP500 are now 1324 and 1339, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


IF We Debauch - ee1


IF We Debauch - ee2

Lethal To Liberty

“The natural progress of things is for liberty to yield and government to gain ground.”

-Thomas Jefferson


I went into this President’s Day weekend writing an intraday note at 3PM EST on Friday titled “Exhaustion.” I wasn’t talking about my physical state. Ex-snow shoveling, I’ve been managing with my peg leg in an air cast just fine. I was writing about the US stock market’s risk management setup.


In the most immediate-term duration (today), US stock-centric investors are going to realize that there is indeed risk to a market that’s been rallying to higher-intermediate-term highs on low-volume and negative skew. From a long-term TAIL perspective, US stocks are simply making lower-highs.


Lower-highs can be lethal to returns, particularly if confirmed by fundamentals that perpetuate lower prices. While plenty a perma-dancing-bull can tell you that the US stock market is “cheap” (if they use the wrong margin and earnings assumptions in their SP500 estimates), this type of storytelling isn’t new to your average American.


After all that we’ve been through in the last 3-years my sense is that Americans get it. Americans get leadership. Americans get liberty. Americans get transparency, accountability, and trust.


Before I take a step back recapping last week’s most important weekly moves, allow me to remind you what risks Main Street Americans see to the US economy:

  1. A 2011 US Deficit of $1,650,000,000,000
  2. A 2011 US Debt balance of $14,173,394,779,991
  3. A 2011 US Dollar Debauchery inspiring inflation

So when the S&P Futures are down 18 points like they are this morning, there are obviously more than a few relatively large risks that the “fundamentalist” might point toward.


There is also this other little risk management critter called The Rest of The World that central planning folks in Washington, DC seem to think are simply being affected by “supply and demand” as opposed to anything that’s right here in our own back yard.


Given that 85% of all foreign exchange transactions are in US Dollars, and the US Dollar continues to be debauched, we think the following week-over-week moves in Global Macro are critical correlated risks to manage around:

  1. US Dollar Index = DOWN a full -1% last week to $77.69 and down for the 6th out of the last 8 weeks.
  2. CRB Commodities Index = UP +1.2% last week to close at a new intermediate-term weekly closing high of 341.
  3. Volatility Index (VIX) = UP +4.7% last week, despite US stocks rallying to new YTD highs.

So how could US investors bid up volatility at the same time as the institutional performance chasing community bids up the price of US stocks? Maybe it wasn’t US only investors…


Maybe, just maybe, The Rest of the World remembers that deficit spending and dollar devaluation strategies don’t work out so well in the end. Maybe some Americans themselves remember what Presidents Nixon and Carter did to the US Dollar in the 1970s. Maybe history remembers The Inflation.


In terms of other important perspectives, this is what The Economist had to say this weekend in its commentary about US Leadership:


“Neither the President nor Republican leaders have had the courage to support them. In the absence of statesmanship, the chances are that only a crisis in the bond markets will provide the necessary impetus. Economic management by fiscal heart attack is not a very prudent remedy.”


This is what a massive international pension fund manager (Gerald Smith, Deputy Chief Investment Officer of Baillie Gifford, who oversees $117 Billion in assets) had to say about American monetary policy:


“If Bernanke wants inflation he’s going to get it.”


And, finally, for all of the professional politician fans who are still left out there in America, this is what Presidential candidate, Mitch Daniels, had to say about US deficit and debt spending:


“We face an enemy lethal to liberty and even more implacable than those America has defeated before.”


It’s all out there now. You don’t need this Canadian with an American family and firm to remind you of the risks. You get it too.


In the Hedgeye Asset Allocation model, last week I invested 6% of our large Cash position in a combination of Swedish stocks and soft agricultural commodities, taking the cash position down from 61% last Monday to 55% this morning.


The current exposures in the Hedgeye Asset Allocation Model are a follows:

  1. Cash = 55%
  2. International Currencies = 24% (Chinese Yuan and Canadian Dollars – CYB and FXC)
  3. Commodities = 9% (Oil and Grains – OIL and JJG)
  4. International Equities = 6% (Sweden – EWD)
  5. US Equities = 6% (US Healthcare – XLV)
  6. Fixed Income = 0%

As you can see in the Hedgeye Portfolio (see attached), I’m short both emerging markets (EEM, IFN, EWZ) and US Treasuries (SHY), so that’s one of the main reasons why I have such a large asset allocation to Cash – I don’t own any fixed income or emerging market exposure as I realize that inflation can and will continue to be lethal to these markets.


As to whether or not the Almighty Central Planners of America are infusing interconnected Global Macro market risks into our way of life … that will be an American history that writes itself on its own time… In the meantime, deficit and debt spending will remain lethal to our liberty.


My immediate term support and resistance levels for the SP500 are now 1330 and 1346, respectively. If the SP500 breaks down and closes below 1330, I have no support to 1306.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lethal To Liberty - ted1


Lethal To Liberty - ted2


Slightly below consensus quarter due to lower hold but VIP volumes were up 40% sequentially and Mass volumes grew as well.




  • Singapore IR contributed revenue of S$775.2 million and Adjusted EBITDA of S$389.8 million
  • "The improvement in the revenue is substantially contributed by the increase in the volume of premium players‟ business with significant contribution from USS (Universal Studio Singapore) and the hotels.
    • There was a daily average of around 8,300 visitors to USS with an average spend of S$85 per visitor.
    • RWS hotel occupancy for fourth quarter of 2010 was 79% with an average room rate of S$294."
  • "An improvement of the margin from the third quarter of 2010... is attributable to the increase in revenue. It is, however, diminished by a lower luck factor in the VIP business compared to the third quarter."


  • Awfully pleased with the way they wrapped up 2010
  • With the sale of the UK business, the management has been able to focus on RWS
  • Grew every part of the business in 4Q however, Lady luck showed less favor but was still in the range of 2.8-3.0%
  • VIP segment  - which has powered ahead with over 40% growth in volume.  Recently added 2 new aircrafts to the Group and are adding more amenities.  Their VIP GGR revenues were 60% of total.  RWS market share increased to 58% for VIP and 52% overall.
  • They are planning many exciting events - Janet Jackson concert kicked off the year
  • BattleStar Galacitica just opened. Journey to Madagascar is due to open soon and will be accompanied by the opening of 2 Robochun restaurants.  The new attractions should attract new visitors.
  • 1,400 slots on the floor including 360 ETGs and 580 tables
  • Beginning to see FIT business take shape with 50% of the USS visitors being FIT guests
  • 1,300 rooms now open
  • Hosting 460,000 guests and hosted 1500 events
  • Transportation to their resort got even better before CNY - Sentosa People Mover - moves 8,000/people per hour and stops in front of their Resort
  • 2011 will be a year where they continue to build on their results.  Chairman expects to keep pulling bunnies out of the hat.


  • What was the increase in RC Volume sequentially?
    • 40%.  Q3 VIP hold was on the high side while the Q4 was on the bottom end of the expected range
  • Seasonality trends across Q4?  
    • They are still continuing to learn about their seasonality.  They just started operations on Feb 14th so they have yet to experience a full year of apples to apples operations (with a competitor in the market).
  • Mass market grew sequentially as well
  • There will continue to be a lot of pre-opening costs in the business as they continue to build out Phase 2.  There will be a substantial amount of pre-opening expenses in 2011 as they look to open more of USS and the Marine Park.  These costs will be significant.
  • Was the commission rate higher in the quarter - ie why was the net revenue only up 6%?
    • No, it was all because of lower hold
  • Almost all the slots are outright purchase, only a few are on a lease basis
  • Cost of the machines ranges from US$22k to $35k US. So far, they have changed out very few machines.
  • Seems like the poor hold had a significant drag on the quarter, what would be the normalized EBITDA?
    • Hold rate is not as good as they want it to be.  MBS held at 3.11%; they held below that.
    • EBITDA would have been 10-15% higher if they held more normally....Hope that they will see better luck for 2011. There is good evidence of that occurring.
  • Jan trends?
    • Comfortable achieving internal budgets for the year
  • VIP contribution of 60% based on GGR - how about on a net revenue basis?
    • 51% on a net revenue basis
  • VIP and Mass tables.  Going forward? 
    • Still have capacity to add some more tables. They have 580 tables but on average, they are only averaging 460 tables in operation
  • Good evidence in January that they picked up on their luck factor. Seasonality issue is difficult to answer given the immature nature of the business.
  • Junket approvals and how do they see the RC business pick up further
    • Some junkets should be licensed this year.  They have no visibility on when that will happen.  When and if it does, it will help them with the business
  • For the year, their VIP win rate has been within the acceptable range of the normal win %
  • Employees at the RWS - 13,000  of which 10,000 are permanent
    • Tracking at 7-15% turnover in the employee base
  • Receivables are up 40% as well. Has credit been a direct driver of performance?
    • They need to give credit directly to the customers - so they will continue to do that until junkets come in. They are pretty comfortable with the level of receivables given the level of revenues generated
  • Any impact from the tightening in China?
    • So far they have not seen any material deterioration and repayment rates have been good
  • Some talk about CRA regulating shadow junkets in the market?
    • No comment
  • Breakdown of gaming and non-revenue?
    • 80-85% was gaming (on a net basis)
  • Have not seen any direct government action to try to prevent locals from visiting the IRs
  • Margins have been more or less the same in the 4Q so far
  • No change in rebate rates
  • What % of employees are foreigners?
    • Just under 30%
    • New levy comes in Sept 2011, and another increase in 2012. It will have some impact on their payroll but not too heavy.
  • Malaysian bus program continues to be strong. Not sure if it was higher quarter over quarter - maybe only slightly.  Malaysian school holidays impact them.
  • Excluding pre-opening expenses, what have costs been doing?
    • They changed their way of reporting Adj EBITDA to match the way their competitors do it - so pre-opening expenses are not in EBITDA
  • Player rebates are relatively flat sequentially at 1.2%.
    • It's exactly the same QoQ
  • Why was the financing cost so high this quarter?
    • In December they recognized early interest cost of new debt - so there was also some accelerated amortization cost of the new financing... all of that is included in the financing costs.  2011 run rate will be lower.
    • Just refinanced their loan last week.  S$3.5BN.
  • New construction will cost them S$700MM
  • Their actual tax rate was higher than the Singapore tax rate due to the refinancing
  • Competitive environment regarding market share?
    • Will compete sensibly to maintain market share. Comfortable with their market share and will try to make as much money as possible
  • They cannot pay a dividend in 2011 - since they need to show a profit on the balance before doing so. But they will be CF positive this year.
  • Appetite for growing the VIP business?
    • Will grow only as far as they feel comfortable extending credit. 
  • 1/3 VIP tables, 2/3 Mass
  • USS is EBITDA positive
  • How did they manage to outperform their competitor by such a margin on VIP RC? Bulk of their earnings should be coming from overseas.  They are working very hard to grow that business.
  • Since they are already open, they can not capitalize any pre-opening expenses but they wont impact adjusted EBITDA
  • 40% was non-VIP this quarter. This suggests that Mass declined QoQ.
    • which is a function of the win %
  • Impact of their aircraft on their margins?
    • Just started flying the first one so will give an update next quarter