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Risk Management: SP500 Levels, Refreshed...

So far, today’s intraday low for the SP500 flashed at 1057. With the US Dollar UP since early this morning, the reason for pressure on anything priced in Dollars is the same as it has been since March. This afternoon, the US Dollar is up less than it was this morning, so stocks are down less than they were this morning. Simple is as simple does.

 

The weakest of the 9 SP500 Sectors in our Sector Views Risk Management product are the 3 that anchor most on whether the Buck is Burning or not: XLB (Basic Materials), XLE (Energy), and XLF (Financials). With the SP500 at 1063 (at the time of my writing this), all 3 of those sectors are down -1% or more on the day.

 

Can the Federal Reserve stop the Buck from Burning on Wednesday? Of course they can. Signaling reality gets rates something north of ZERO. Something north of ZERO = US Dollars up, and everything REFLATION toned down…

 

XLV (Healthcare) is the only sector we are currently long in US Equities. It’s also the only sector of 9 that is up on the day. It’s defensive. After the SP500 makes a YTD high (Friday), we like defensive. We also like buying sectors that are offensive when they are down.

 

Where do we go next? Our Risk Management matrix has the immediate term TRADE lines of resistance and support at 1078 and 1054, respectively.

 

Prior to this morning’s open I said that the risk was outweighing the reward. However, as prices and other factors in my models change, I do. If 1054 on the SP500 holds, the reward will once again outrun tomorrow’s risk.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Management: SP500 Levels, Refreshed...  - a1

 


MGM: UPDATE FROM LAS VEGAS

Here are the MGM notes from our meetings in Las Vegas last week

 

 

CityCenter slots:

  • They are opening with baby steps on SBG. The service window, a portal for the customer at the slot machine, allows them to communicate players club info (points/free play), to educate the guest and advertise the hotel amenities, and to use it to market promotions. Over time, they will figure out how to better yield the floor/change demons/change min wagers
  • There are certainly challenges with interoperability. IGT/WMS imbedded the window into the games. BYI/ALL/Konami separate the window from the games. So the iViewDM will facilitate the server based window software on all BYI/ALL/Konami devices. Takeaway ability to change the number of min lines that you can bet on
  • Slot market shares:  WMS - 22.5%, IGT - 50%, BYI - 20%, ALL - 5%, Konami - 2.5%
  • Participation levels are at 8% - all the big players
  • 800 slots on the floor now were ordered in May.  1,940 slots currently will be on the floor. Pricing is the first thing they look at.  $17k is the average price - BYI - $10k for basic 3 reel standard. Barcrest - $30k bonus top products
  • The company uses IGT for accounting and marketing. IGT had invested the most capital into SBG

 

 

Environment:

  • In 3Q/4Q09, tons of meetings were cancelled so the company thinks that 2010 will be better
  • Vegas is stealing a lot of business from other markets because it’s a lot cheaper there
  • Excalibur is sold out the last four weekends at $79 per night. All of it is last minute or walk in business
  • Harrah’s is sold out through October on weekends because they priced too low
  • The mood is better but there is still a way to go
  • It is difficult to push up rates, especially for leisure.  They would be happy to get a few percentage points of increase in 2010 ADR
  • MGM thinks 2010 will be better than 2009 for sure

 

 

CityCenter:

  • Mandarin will price the highest. But their other rooms will likely price below or at Wynn’s level
  • Harmon will be finished out at the end of 2010
  • They will open the retail 50% full. The rest of the tenants will be in by April/May 2010. 90% of the space is contracted but the Tier I’s aren't complete. LVHM, Hermes, Tom Ford - anchors

 

 

Macau:

  • They are doing $20mm of FCF
  • A new team recently put in place down there that found a lot of issues - control related (Side betting)
  • Property should be doing $250-300mm in EBITDA

 

 

Stock price:

 

  • An equity/convert deal now would make sense but Kerkorian may not want to be diluted
  • Shocked that their stock is getting bid up

 

Asset sales:

  • Bid/ask has narrowed a lot now
  • MGM thinks they can sell the Mirage for 10x
  • They wouldn't sell any Vegas assets now

LVS: UPDATE FROM LAS VEGAS

Here are the LVS notes from our meetings last week in Las Vegas

 

 

Macau:

  • LVS thinks that the mass business will grow in correlation with the GDP/infrastructure
  • VIP will be volatile
  • They are most bullish on Mass business
  • LVS won't be involved with Hengqin island development
  • Beijing wants to see the IPOs get done - pumping the numbers beforehand. The government also wants to see the Cotai strip get developed
  • LVS doesn't think they will loosen visitation restrictions. So basically the government is massaging the numbers to get IPOs and to get Cotai developed.  Guangdong was upset over the visa restrictions and people were getting killed over credit issues. It’s easy enough to come to Macau through a tour group
  • They don’t think that there is a correlation between visitation and gaming revenues for mass/VIP revenues.   90/10 rule - especially for Mass
  • Mass is more correlated to Chinese GDP growth.
  • Sands only has 20k visitors per day and they drop $600mm vs Venetian which does $700-800mm in Mass and has 50-60k visitors per day
  • Slots revenue is more correlated to visitation
  • Beijing just cares about job growth - that's why they want them to open Lots 5+6. They also know that in order for them to open they need to make some money.  Hence the motivation for allowing the selling of condos/selling of retail: LVS can reinvest in the strip
  • IPO will happen by year end - HK listing

 

 

Competitors

  • MGM is trying to get the mass business moving
  • CoD doesn't have the mass play
  • Oceanus - location will be an advantage

 

 

Las Vegas:

  • It’s all about room rates for them
  • MGM is still being very aggressive – they don't want to have a lot of inventory for 2010 - so they can markup City Center rooms
  • Wynn sets the rate. LVS prices right below Wynn, and everyone else falls in line
  • If they can raise rates they will make a ton of money
  • LVS would rather go into 2010 with a lot of inventory
  • It took a while to get the Palazzo "running"
  • If City Center prices above Wynn/Encore - and fill - then it’s great for everyone
  • Room rates are firming but it’s just seasonal
  • They think that, following the Encore addition, Wynn had to go deep to sell their rooms

 

 

Balance Sheet

  • LVS will send back $1.4bn back to the states following IPO – they had $2.2bn of cash at 6/30 at the US subsidiary. 5.2bn, including 3.6bn of cash.
  • Without the Macau IPO there is no equity in the USA

 

 

Capex

  • $50mm of maintenance capex in Las Vegas
  • Venetian looks a little tired – they will need to invest some capital

 

 

Singapore:

  • LVS is trying to have a large credit operation in Singapore in order to operate a direct marketing business
  • Expecting Jakarta, Singapore, Bangkok, Kuala Lumpur - not so much China (less than 5%)
  • LVS can enforce a gambling debt in Singapore
  • They will have some junkets there but it is hard to qualify under Singapore law
  • We believe the lack of junkets will slow the ramp in Singapore
  • They would be surprised if they didn't have the same visitation as Sands although they are not sure that most of them will gamble because of the admissions tax
  • Focused on a February opening - but won't know until November. They will open with 1,000 hotel rooms when they open (February 28) - out of 2,850 rooms.  The remainder of them will open within 90 days of opening.  LVS will open with 50% of the retail, then up to 90% in 90 days and last 10% will slowly roll out
  • LVS thinks that just hotel and retail can do $250MM in EBITDA for a full year (down from 330MM because of a drop in RevPAR).  With respect to retail, they are happy to rent at $300 per foot.  $400 was the peak
  • They thought they could do ADR of $270 with 90% occupancy.  Currently it seems like the performance will be closer to ADR of $200 with 90% occupancy
  • To come into the casino one needs to pay 100 Singapore Dollars ($60) if you are Singaporean. It costs 2,000 Singapore Dollars for the year
  • They are not sure how long gaming will take to ramp.  For Sands Macau they have been building the business for two years
  • They think it will open very strong and keep growing as all the other attractions there open.
  • The cost will be $5.5bn US dollars
  • Genting will open first - will give them something – 2,000 will incentivize them to do only one

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PLANET HOLLYWOOD: UPDATE FROM LAS VEGAS

Here are the Planet Hollywood notes from our meetings in Las Vegas last week

 

 

Strip commentary:

  • The bridge connecting both sides of the strip should be completed by Dec 2010
  • They think that the Cosmo will open Dec 2010 in some limited capacity
  • There has been absolutely no activity on the Fontainebleau, and apparently they have shut down their office too – no one is picking up the phones there
    • We heard from a second source that PENN is trying to buy the project for around $100-$150MM, and other potential investors are looking at buying the site for similarly small amounts given the $1.5BN+ of funding the project still needs to open

Business environment:

  • “We’re bumping along the bottom”
  • For September, occupancies are in the 90%’s, but ADR is still very depressed. 
    • The next five nights in Vegas are booked solid with three conventions in town.
  • When we met with Planet Hollywood in April they told us that they were testing increasing rate… apparently they tested it and couldn’t pull it off
    • They are trying different strategies post guest bookings to up sell the customer
      • Selling early arrivals, giving free liquor with room stays, allowing guests to “bid” on a premium room when they are available
  • The lack of business travel is an issue, so the occupancy is lower quality
  • Value restaurants are doing very well, fine dining not so much
  • Summer occupancy was ok, but spend per customer and ADR continued to be weak
  • Groups are still struggling, when they are willing to make future bookings they want to make them at $150 per night, not $200. Leisure is a little better
  • Baccarat play is generally stronger than other segments

 


BYD: UPDATE FROM LAS VEGAS

Here are the BYD notes from our Las Vegas trip last week

 

 

Las Vegas Locals:

  • BYD doesn't think the unemployment level matters as much as consumer confidence
  • People have adjusted
  • They believe that they are at a bottom
  • We were surprised they weren’t more negative on this market given current economic factors

 

 

New supply in LV Locals:

  • M resorts, Cannery East, Red Rock, South Coast, Aliante. (Cannery, Aliante, M resorts)
  • There is little change in the promotional environment other than some more free play.  There has been a rational response to M coming online
  • Going forward, there is not a lot of new stuff coming online

 

 

Blue Chip:

  • It is too early to tell about Firekeepers. It is likely to steal a lot more business from Four Winds as it is within an hour from their property
  • Competition is as rational as they could hope.  Wouldn't want to open the tower in this economy and they aren't getting the return they want

 

 

Borgata/AC:

  • MGM in AC - If MGM has to exit - they may not want to buy the other half of Borgata. They can't buy the other half without causing some covenant issues/amending existing agreement
  • Impact from PA - There is very little impact from Bethlehem.  Table games will probably have an impact on them
  • AC - Revel won't be good for them. They think that the timeline laid out was aggressive
  • There is $20mm of dividend payments from Borgata annually

 

 

Stations:

  • They are very interested in Stations
  • Offered $950 million on the OpCo – can do that under the existing financing
  • Timing is uncertain – they have an exclusivity period of 120 days

 

 

Echelon

  • Pretty buttoned up on capex
  • They had $90mm to payout and it’s mostly done
  • No deadline to do anything there – need an economic recovery and with it, clarity on what is happening on the Strip
  • $700mm was of construction costs incurred on the property

 

 

Capex:

  • They are still buying slots
  • Spending 50mm on maintenance (used to be 120mm) – slots was 50% of that but now it is more than 50%
  • They can maintain the lower level of capex for 2 years
  • Properties are very fresh and there is no need to increase the level of capex at present
  • All cash is going to pay down debt
  • Final payment on Danai Jai Alai – $47m + interest will be made in Q12010

 

 

Credit facility:

  • May 2012 – maturity of bank line
  • Going out beyond 2012 for a bank line is too expensive
  • They will leave the credit facility in place for now

 

 

Acquisitions:

  • No fixed multiple for an asset
  • One problem is that they can't buy anything cheap

 

 

Downtown:

  • Still a good niche operation
  • $700-$1,500 package deal from Hawaii
  • It is difficult to steal from the downtown market because everything is cheaper there - harder to relocate
  • 3Q - will not be an easy comp but 4Q will be
  • For downtown - need to see fuel indices

 

 

Louisiana:

  • Never really participated in the bubble
  • Oil prices are helping. Delta downs - had easy comps due to the hurricane
  • They are doing creative marketing
  • Treasure Chest – there is more competition. Plus Katrina money is leaving. Business is derived almost exclusively on a local basis; there is no hotel at the property

 

 

General commentary:

  • It’s all about spend-per-visitor
  • It’s just a question of confidence
  • Non-rated business got hurt the most - lower priority. They are higher margin customers too

BYI: UPDATE FROM LAS VEGAS

Here are the BYI notes from our meetings in Las Vegas last week

 


Replacement demand:

  • Casino budgets were set by corporate in October/November- so calendar 2009 will remain lackluster
  • They are not expecting big improvements in 2H09
  • They think normal replacement is 7-10 years. So 70-100k is "normal"
  • Ohio, IL and Italy are all centrally determined markets and BYI claims that WMS can't really participate in those markets

 

 

New casinos/markets:

  • BYI attained 20% market share at City Center, IGT got 50%, WMS got 22%
  • Illinois - They are meeting with a distributor in Chicago.  Video poker pays back 98% so you need a multi-pack offering. They don’t think that IGT gets more than a third. Systems is another big opportunity.  With respect to timing, they will have a better idea on timing Thursday
  • PA - doesn't think VLTs will happen

 

 

Participation:

  • They only have a few products in the WAP category. They have 700 digital towers in the queue - lap or fixed fee
  • BYI differentiates their participation games by performance solely
  • They have 14 test banks to see what works.  Licenses are tough to get and expensive. They are launching new games in the WAP business, which is a very tough segment to penetrate
  • WMS is doing a great job in WAPs and community gaming. WMS is being very aggressive

 

 

Mix:

  • Steppers: strongest space
  • Video: think that this will be their strongest G2E
  • V32 video is performing very well for them. They don't have great video for cinevision. They will do a bunch of wheel games too

 

International:

  • The international market is a huge opportunity for them - 16% of revenues and 22% shipped
  • Europe is 70% Novamatic
  • Australia - ALL owns that market 60-70% but is 3rd in terms of ship share. BYI is about 20% there
  • BYI has very good relationships in some European markets/Australia
  • They are re-launching in Australia this month.  A monopoly expires in Victoria in 2012 - so that's a big opportunity consisting almost entirely of video machines
  • They are working on South America/Europe. They are getting bombed by distributor type deals

 

 

General commentary:

  • They don't think the economy is recovering - just bouncing along the bottom
  • No question that new units will be way down next year

 

 

Products:

  • They have 40k S6000k’s in the field
  • They have 46 titles on the big spinning reel games. Digital towers.  V32 (tower like - similar to “Deal or No Deal”).  Have 7 new titles vs just one
  • Dual vision is like a wheel of fortune game - 2 people can play together.  The performance has been very strong - couples play it. Daily fee or participation
  • Fireball - it’s their hottest title. Digital tower series
  • Power strike - very strong - cinevision
  • Reel money - V32 really cool. Cash meteors - can spin - touch screen
  • Cash wheel - spinner on cinevision

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