MGM released an 8K stating that it may need to take an impairment charge on CityCenter. While that's no surprise, the comment that sales proceeds from the CityCenter residential segment may come in below cost is not good.



MGM released an 8K this morning, stating that it may need to take an impairment charge on CityCenter and its condo developments at CityCenter when it reports 3Q09 results.  Is anyone surprised that the PV of the cash flows won’t add up to north of $11BN?  What may be a surprise is that residential sales proceeds may fall below cost.


MGM made two comments regarding the value of CityCenter

1)      The value of the casino, hotels, and retail, will have to be written down since the present value of the cash flows will be lower than the net book value of the development – ok, this is really no surprise to anyone

2)      The eventual sale price of the residential piece of CityCenter will likely be below the construction cost plus marketing/selling cost, which sounds like they are going to have to lower prices even more than expected


Well, the good news is that MGM only owns 50% of CityCenter ….


“The Company expects to conduct an impairment analysis of its investment in CityCenter as of September 30, 2009. The Company believes it is reasonably likely that the outcome of this review may lead to a non-cash impairment charge but cannot reasonably estimate the amount or range of such impairment charge at this time. 


In addition, CityCenter has a significant amount of residential real estate currently under development. Its ability to close out its residential sales program will be based, in part, on future market conditions. As disclosed in the June 30 10-Q, CityCenter may incur a non-cash impairment charge if discounts to the prices of residential units prior to completion lead to a conclusion that the carrying value of the residential inventory is not recoverable based on management’s estimates of undiscounted cash flows. Once the residential inventory is complete, CityCenter will be required to measure such inventory at the lower of a) its carrying value, or b) fair value less cost to sell. It is reasonably likely that the fair value less cost to sell of the residential inventory at completion will be below the inventory’s carrying value, and that the joint venture will be required to record an impairment charge at that time — which may be in the fourth quarter of 2009 or the first quarter of 2010. The Company would record 50% of any such impairment, offset by certain basis differences, as a part of ‘Income from Unconsolidated Affiliates’ in its Consolidated Statements of Operations.”

Healthcare Swingers

“So was I once myself a swinger of birches; And so I dream of going back to be”
-Robert Frost “Swinger of Birches”

I am always surprised by how quickly time passes and how little I remember from even just a few weeks, let alone months ago.  Perhaps having a career that rewards me for only looking forward leaves no room to absorb the historical context of these passing moments.  Fortunately, Research Edge makes it our business to remember, to comb over the history books, to find the patterns hiding in the plain sight of the data. 

Senator Baucus announced his version of Health Reform yesterday, a major milestone in the healthcare debate, bringing to a close an adventure which began with his “Call to Action” a mere 10 months ago.  The United States had just elected the young and compelling Barack Obama to the Presidency a few days before and riding the wave of optimism in the face of the global financial crisis, the new President announced the ultimate in legislative challenges, Health Reform.  He then tapped the unlikely Baucus to spearhead drafting legislation that would fundamentally change Healthcare. 

My analytical life since has been tangled up in the world of politics and policy the last ten months,  learning as much about how the game is played as the policy details of the debate.  It is staggering and a little depressing to see how quickly hope and optimism can fade, how much effort could be wasted, and how little the system would ultimately be changed.

Adding 33M newly insured Americans, creating new tax codes, and wrenching fees from industry are significant changes, and if this legislation is signed into law, it will accelerate growth for a decelerating Healthcare industry.  It’s one of the reasons the Healthcare sector is one of Keith’s favorite sectors.  Ten months ago, any changes seemed improbable, but here they are…and as significant as they are, they leave untouched the problem of healthcare costs.  

Baucus’s plan holds firmly onto the same payment systems and the same incentives which has brought us this “healthcare crisis.”  Providers will still be paid on a per click basis, guiding their businesses (physicians included) to the highest value procedures. The government will continue to underpay for service, just more frequently with an expansion of Medicaid, forcing more providers to ferret out the lucrative procedures.  Industry will continue to set prices for advancements in care, both marginal and material. And private insurance and the private sector will continue to pick up the slack. The Baucus proposal is a story of incremental change and tells the Healthcare industry not to worry; we are leaving the details to be filled in later by Medicare and your normal channels of influence.  If history is any guide, leaving the details to Medicare leads to marginal changes at best.

Healthcare is no longer the defensive sector it once was.  Revenue growth is no longer reliable in good times and bad. The Aging Boomer is far less important than the Consumer Confidence index.  Healthcare continues to consume an ever increasing share of personal spending and the correlation between consumer spending and healthcare is at an all-time high.  
Meanwhile the correlation between the USD and equities remains as strong as ever, for now. Dollar down equals equities up. As the vote counting for the Baucus bill progresses, with all the drama of an uncertain outcome, our creditors will be voting as well.  Without payment reform, the Baucus proposal merely rearranges the deck chairs, taking fees from industry, writing new tax code, and injecting a revenue booster into the Healthcare Economy, but doing little to change the delivery of healthcare. Without Payment Reform, the well documented weights on the USD, budget deficits and national debt, may be heavier than ever.


In Frost’s world, he’d like merely to be young again and go for a ride on a birch tree.  The optimism 10 months ago is gone and the story of Health Reform debate may yet again be the old and wise looking back in nostalgia at a missed opportunity.


At least Frost swung from birches.

Thomas Tobin
Managing Director


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

FXC – CurrencyShares Canadian Dollar With the USD continuing to Burn we added to our International FX exposure (we’re also long the Chinese Yuan) on 9/14 via the Canadian Dollar.

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong The current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. We shorted EWU on 9/9.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

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.



Seven people are dead and four are missing as typhoon Koppu hit south China.  More than 100,000 residents had to be evacuated as torrential rain caused mudslides in Guangdong province.  The typhoon has thus far resulted in an estimated economic loss of two billion yuan, according to the civil ministry.  Houses in parts of the province were destroyed and a cargo ship ran aground in Zhuhai city’s harbor near Macau, spilling 50 tons of fuel into the sea.




Due to the rising prices of shares in gambling companies in Hong Kong, Wynn Macau is considering increasing its IPO fundraising target by 30-40% to HK$7.8 billion, according to an unnamed source.

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Malcolm Knapp reported that August casual dining same-store sales declined 5.4% with traffic -4.6%.  For the fourth consecutive month, comparable guest count results were better than sales by close to 1%, which points to the significant discounting in the industry. 


These reported numbers improved on a sequential basis from July, becoming less bad after getting increasingly worse for five consecutive months.  Although comparable sales growth came in 2.9% better than July on a 1-year basis and 1.6% better on a 2-year basis, the rumor mill was suggesting a -4.0% August number versus the reported -5.4% so overstated expectations may offset some of the impact of this sequentially better sales news. 

McCullough Discusses the Reflation Roation


At first glance the quality of the quarter is suspect and P8 same-store sales for Carl’s Jr. continue to decelerate on a 2-year basis.


As expected lower food costs saved the day for CKE, but two items highlight the challenges the company faced in making the numbers in the quarter – (1) a lower tax rate and (2) At Carl’s Jr. there was an adjustment to workers compensation expense that benefited labor costs, mitigating the decline in store level margins.


We will have more after we have a chance to talk to the company.


CKR also reported same-store sales for period 8.  While the absolute decline was the best in five months at the Carl’s Jr. concept, on a two-year average basis the numbers slipped 1.1% sequentially.  Hardee’s remained flat sequentially on a 2-year average basis at -0.1%.






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