“We are in the only business where we are wrong everyday on something - yet we still enjoy it.”
This was a quote that we received from a client yesterday and I thought it was great. We are all in a business where the facts change daily and we need to make decisions to adjust to what we have learned. There is a high probability we are going to be wrong, but we all work hard to lessen those probabilities.
I know if I have done my homework and work through all of the probabilities, the first thing I always say is, “I could be early.” In this business, duration is very difficult to solve for. I would rather be early than late. Personally, I just don’t like being wrong.
Yesterday, Keith came down hard on himself for being too early in introducing one of our new 4Q09 themes, the “Bombed Out Buck.” For the past two weeks the US Dollar rallied and the S&P 500 corrected as a result. So far this week, the US Dollar has burned to a higher-low, keeping the most dominant global macro TREND in place, dollar down - stocks up. Yesterday, the dollar ended slightly higher and stocks were mixed.
As we have said in the past, those that have benefited the most from the burning buck are bankers, politicians and debtors, and I’m going to add the US consumer. Keith has challenged me to think that a “bombed out buck” is good for the consumer, but I’m not there yet. Based on metrics we see for those that analyze consumer confidence, we live in a time where we calculate the health of the US economy and thus, consumer confidence, by using the price of a stock market. The 56% move in the S&P 500 since the March 9th low has done wonders for the consumer. Consumers have once again regained some confidence in one of their most important Assets – the 401k.
Keith may have been early introducing the “bombed out buck” theme, but in global MACRO themes take time to gestate and this theme should not be ignored. Why? The crashing of our currency is not going to end well. The Re‐flating of assets and creating another bubble is bad, not good and an unhealthy means to an end. In the long run, there is a real possibility that the US Dollar's stature as the world's reserve currency will be dead. This is BAD!
Helping to find a tactical bottom in the dollar will be the performance of some key commodities. Yesterday, Gold climbed to a record level for a third day, while oil and copper were higher as the dollar is burning. It’s a vicious circle we are in now - the dollar is burning, driving commodities higher as inflation fears grow. As inflation fears grow greater, interest rates rate are headed higher which means the buck is bottoming.
The bigger issue we need to consider with the “bottomed out buck” is the politicians in Washington. The “I-Believe-in-Strong-Dollar Turns Relic as China Begs Stability” story on Bloomberg today does not instill any confidence at all. The Obama administration has no creditability in the currency markets when talking about a “strong dollar” policy.
In 2009, the most dominant theme in global MACRO has been the “burning buck.” We are now working on setting the stage for the next chapter of the US dollar – “the bottomed out buck.”
Early or not, it’s a factor that cannot be ignored.
EWG – iShares Germany —Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.
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.
XLV – SPDR Healthcare — We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.
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.
USO – US OIL Fund — We shorted oil on 9/30. The three Fed Heads put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.
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.
“We are in the only business where we are wrong everyday on something - yet we still enjoy it.”
Wynn Macau will begin trading in Hong Kong tonight and it should be a successful first day. Thanks to some pretty in depth disclosure, we were able to build out a very detailed model. The model is available to clients upon request.
As expected, Wynn Macau’s IPO was a big success, as much as 10x oversubscribed according to numerous articles. The stock begins trading on the Hong Kong stock exchange tonight. According to our quick math, Wynn Macau looked attractive even at the top end of the pricing range (see: “WYNN MACAU IPO: CHEAPER THAN IT LOOKS” published on 9/29/09). Now that we’ve had some time to pour through the offering circular, we thought that we would share some further thoughts with you.
Our thoughts are broken into two sections: Projections and Fun Facts (for the other model geeks out there).
While our revenue model didn’t change, Wynn Macau provided loads of details on their cost structure, most of which we incorporated into our EBITDA calculation. Our new EBITDA estimates are net of royalty fees and corporate allocations and take into account the new commission caps. We assume the annual caps provided on page 127 of the preliminary circular for our corporate allocation calculations. We also assume that Wynn will pay an “all-in” junket commission rate of 41% (vs. the maximum of 44%).
Based on our estimates, Wynn Macau priced at 16x 2010E EBITDA and 15x 2011E EBITDA, which we believe is equivalent to an 11x and 10x tax adjusted multiple. Once Encore is complete, WYNN Macau should generate FCF in the range of HK $3.5BN and have zero net debt by the end of 2011.
As we already mentioned, Wynn Macau’s circular provides a plethora of detail on the business and the cost structure in particular. Below is some supplemental information that we found interesting.
Unlike in the US, Wynn Macau’s revenues are already net of promotional expenses and discounts. This means that rooms, food & beverage and retail & other revenues do not include the retail value of complementary rooms provided to junket operators. Since opening, the percentage of rooms and food & beverage allocated to “comps” has steadily increased. For 1H09, 74% of the retail value of rooms and 66% of the retail value of food and beverage operations were “comped.” Retail & other is almost exclusively a cash business. For the purposes of junket commission calculations, rooms will be discounted by 40% and food & beverage will be discounted 30% from retail values.
In addition to paying 39% of gross gaming win to the government of Macau, concession holders also pay fixed and variable gaming premiums based on the number of VIP / Mass tables and slots that a facility has. Wynn Macau pays a fixed annual premium of HK$29.1MM plus an annual charge of HK$291k per VIP table, HK$146k per Mass tables, and HK$971 per slot machine.
In the breakout of “Other Operating Expenses” in the appendix of the circular one can find junket commissions broken out. However, at first glance the number seems extremely low (roughly 0.2% of rolling chip). This is because “Casino Revenues” are already net of the portion of the junket commission that is a rebate to customers. To calculate the all-in commission rate that we all refer to, you need to include the rebate as well as the discounted value of “comped” rooms and food & beverage. We estimate that in 1H09 WYNN Macau paid an equivalent rate of 1.29% to junkets or 41.5% of gross win.
MACAU’S CASINO RECEIPTS RISE 52% IN SEPTEMBER macaunews.com.mo
In September, the casino industry’s gross receipt hit MOP10.8 billion (US$1.35 billion). The figure represents a year-over-year increase of 52% for September. In the first nine months of the year, the casino industry’s gross receipts amounted to approximately MOP83 billion (US$10.38 billion), a year-over-year decrease of 2%.
In terms of market share, SJM remains number one, taking 30% market share in September. LVS had 20% of gross gaming receipts, MPEL had 17%, and Wynn had 15%. Galaxy and MGM took market share of 10% and 8%, respectively.
STANLEY HO WINS BID TO END SISTER’S PLEA OVER SHARE DIVIDENDS scmp.com
Stanley Ho, who remains in hospital following brain surgery, yesterday won in his bid to strike out a petition from his sister over the payment of share dividends from his company, Sociedade de Turismo e Diversoes de Macau. The Court of First Insurance yesterday struck out Winnie Ho Yuen-ki’s petition on the grounds that she had launched her protest via an improper “vehicle”.
Winnie Ho alleged in her petition that they had breached their duties of good faith and loyalty towards Shun Tak Holdings and failed to cause it to pursue STDM for proper payment of dividends. She sought an order to direct Shun Tak to start litigation against STDM to recover dividends. The judge held in her judgment that Winnie Ho should have sued STDM directly as a shareholder of the company.
WYNN DEBUT MAY DEAL INVESTORS A BUM DEAL scmp.com
The South China Morning Post outlines some of the negative sentiment surrounding Wynn’s Hong Kong trading debut tomorrow. Many commentators see the offering as being overly expensive when “compared with other Macau shares”.
In terms of the Macau gaming industry, concerns include “Beijing's fluctuating travel policies” and a risk that the recent revenue boost in Macau has been partly due to “a honeymoon period because Macau's new chief executive takes office in December”.
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The consumption recession continues with today’s release of Consumer Credit data for August by the Federal Reserve which showed a $12 billion dollar contraction for the month – steeper than forecast and the 7th consecutive decline.
Consumer spending is a function of several things, the largest of which is employment. With federal unemployment expected to thrust through 10 percent in 2009, the elimination of jobs in and of itself will continue to mount pressure on people spending money that they do not yet have.
The consumer propensity to spend over the past decade was fueled by plentiful consumer credit. U.S. household debt as a percentage of annual disposable personal income was at its highest rate of 127% at the end of 2007 versus 77% in 1990 and, though declining, remains at elevated levels today.
In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%. The credit crisis and the recessions, coupled with an unprecedented amount of consumer debt, have led to all-time high credit card delinquencies. High delinquency rates, in the face of increasing unemployment, means that credit cards will not be repaid which eliminates capacity to spend and makes less credit available to consumers. With credit contracting, consumers will likely pull back their spending and save more or pay down debt.
The bottom line is that the continuing economic uncertainty, continued job losses and a contraction in credit will alter changes in consumers’ spending behavior for some time. Until we start to see more convincing signs of stability in employment, home value appreciation, and bank credit expanding, meaningful economic recovery remains elusive.
Given the preannouncement on September 23rd, there shouldn’t be any big surprises on MAR’s 3Q09 call.
We expect MAR's 3Q results to be somewhat messy given the $760MM of impairment charges related to the timeshare business. We all know that the leisure business is elastic; the real question is whether the corporate segment of the business is showing any signs of life. We don’t think so.
On September 23rd, in addition to announcing a restructuring of their timeshare business, MAR also gave an update on its 3Q09 NA comparable system wide RevPAR performance which is now expected to be down 19%. The results for 3Q are a little better than the expected 20-23% decline MAR guided us to in July, with the better-than-expected performance driven by leisure demand. This comes as little surprise to us since MAR alluded to this on their last call, CCL reiterated the same comments on its earnings call several weeks ago and we know that leisure demand is elastic.
“Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.”
-Arne Sorenson; July 16, 2009
The real issue for MAR and most of our lodging companies is that any real recovery will rely on the health of corporate travel, which is where the majority of their business is sourced. With unemployment still rising and approaching 10%, albeit at a slower pace of increase, we don’t see any immediate rebound in the cards for corporate lodging demand. However, given the cyclical nature of the lodging group, as long as people continue to believe a market recovery is around the corner, lodging stocks can continue to perform.
Excluding extraordinary charges, our numbers are at the top end of MAR’s guidance and a little ahead of consensus. We think MAR will print $0.14 EPS (guidance: $0.09-$0.14, Street: $0.12) and $162MM in adjusted EBITDA (Street: $159MM) tomorrow. Timeshare is always a wild card, especially this quarter with all of the charges, but we expect total fee income to come in at $220MM and owned and leased income to come in at $7MM.
Marriott should benefit from a weak dollar in 4Q and in 2010 if exchange rates stay where they are. However, we are still moderately below the street and MAR’s guidance for 4Q09 and below the street for 2010. Marriott typically gives preliminary guidance for the following year in 3Q.
We expect MAR to elaborate and give an update in its new timeshare strategy announced on September 23rd. As a reminder, below is a “Youtube” of MAR’s new timeshare strategy.
"Today's announcement reflects the significant decline in demand for luxury residential real estate over the last year. It also reflects the relative strength and deeper market of the traditional timeshare business which, while impacted by the weak economy, has proved to be more resilient. For all aspects of this business, our goal remains to drive cash flow. We expect the timeshare segment to produce positive cash flow in 2009, higher levels of cash flow in 2010, and improving profitability."
- “Marriott expects to reduce residential prices, convert certain proposed projects to other uses, and sell some undeveloped land. Going forward, while Marriott expects to continue to license and manage luxury residential projects developed by others as part of its lodging business, it does not expect its timeshare segment to pursue new Marriott-funded residential development projects.”
- “Demand for luxury fractional units remains constrained by the weak economy and the significant supply of luxury residential real estate on the market. As a result, the company has decided to reduce prices of existing fractional units to accelerate sales and cash flow, prompting the third quarter charge. The company will sell a portion of its fractional inventory as part of the new portfolio membership program in Ritz-Carlton Destination Club ("RCDC")”
- “Traditional U.S. timeshare business, recent successful marketing promotions included volume discounts and other purchase incentives. The company expects to continue targeted short-term promotions”
- “Company's four European timeshare and fractional resorts continue to experience low demand. As a result, the company plans to continue promotional pricing and marketing incentives, while reducing overhead to accelerate sales and cash flow. The company is currently not pursuing additional development in Europe.”
- Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.
- With occupancy levels stabilizing in the low to mid 60’s, pricing has become a greater challenge. Everyone is price sensitive today, not just vacationers. We expect pricing power to return only as occupancy recovers.
- Outside North America we are starting to see more significant RevPar declines with the economic downturn affecting most markets.
- We have eased brand standards where it makes sense and deferred scheduled renovations to help owners.
- On the development front, we opened more than 8,000 rooms during the quarter and have 110,000 rooms in the pipeline
- Going forward... it gets harder and harder to maintain those margins because it is a rate driven drop. In addition, comps get more difficult because we actually started in the second quarter, but more so in the third quarter, cutting and controlling costs out in the field. I wouldn’t give up and say there is nothing there but it is going to get more difficult going forward.
- Right now we have a very short booking. The meeting planners bookers are sitting on the sidelines waiting to see if they can get a better deal, hoping for better pricing, and so there is a very short window right now.
Balance sheet commentary:
- We continue to aggressively manage our balance sheet and we are committed to our investment grade credit rating.
- Through continued reductions in our investment spending and substantial cash flow from our fee based model, we expect to be able to continue to reduce debt in 2010, further improving our leverage ratios.
I’m a Bloomberg guy, so I must admit that I did not truly appreciate how consensus our long standing Burning The Buck call has become. A few days on the road, from Denver to Pittsburgh, being force fed CNBC in my hotel rooms changed that. When Melissa Lee thinks she is a US Dollar correlation expert, a bottoming process for the buck is likely in motion.
This inverse correlation can make you laugh. It can also make you cry. If you are short REFLATION stocks on Dollar Down days, you get the crying part. Last week, the US Dollar was up on the week, for the 2nd consecutive week, and the SP500 corrected, as a result. In the last 2 days, the US Dollar has burned to a higher-low, stoking returns for anyone who was braver than I to stay with this dominant global macro TREND until the bitter end.
For now, my initial thoughts on a Bombed Out Buck are immediate, not intermediate, term. At the US Dollar Index price of $78.61 (chart below), you can see the dominating intermediate term TREND line of a Burning Buck. That TREND not setting up to change any time soon.
What could change, and quickly, is the immediate term duration (3 weeks or less), and if I see that resistance line of $77.07 overcome, it will immediately become support. The point here is that there is no line of resistance between that TRADE ($77.07) and TREND ($78.61) line. A bubbling up of the buck to the tune of a +2% move (from $77.07 to $78.61) will definitely wreak havoc on the REFLATION trade. That I know. That’s why I am raising my position in US Cash.
This morning’s earlier lows in the US Dollar (and highs for the US Equity Futures) came with a US Dollar Index hitting higher-lows (versus the YTD low of $75.80). Higher-lows help us understand that bottoms are processes, not points.
Keith R. McCullough
Chief Executive Officer
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