Steve's commentary

  • "It hasn't been too bad this quarter"
  • 1Q09 confirmed their worst fears for LV, 2Q09 wasn't much better, and in the summer things began to pick up
  • If things continue as they are they will beat the 08' results in Vegas this year and in Macau
  • If rate at Encore was $350 then annual EBITDA would have been $150MM higher
  • Room rates are still down because midweek rates are weak given lower business/convention travel
  • People that come to Vegas are spending less on everything 
  • Get the benefit of some Asian spill over
  • Capital structure (ie low debt) protects their franchise until the economy improves
  • You can always buy revenues, its the bottom line that matters - D&A is real (meaning capex) and so is interest expense
  • "Bigger is not better - better is better"... love the Sheldon shot
  • It's not about market share it's about the free cash flow and ROI - basically he's saying that his equipment is most productive and he runs his casinos most efficiently in terms of maximizing ROI per gaming position
  • Encore in Macau is completely budgeted and under control.  Opened some parts already will be 100% open by April
  • Prettiest and most beautiful thing they've ever built
  • Building was built to meet the needs of the VIP business in Macau... "in a hundred cunning ways it will ingratiate itself with the customers"


  • Domestic high end business - is that improving? 
    • International has held up well, but the high end domestic business has just not returned yet
  • How does the group convention calendar look for 2010/2011?
    • Booking window is still very compressed.  Hearing that people will start spending their budgets, but that won't happen until 2Q2010 they wait for things to stabilize
    • Had two large cancellations last week... I love how honest Steve is... he thinks that there is still political stigma coming to Las Vegas
  • Response to City Center?
    • Focusing on the fundamentals, employee morale and good service
    • They know that a lot of people will go and check it out... nothing they can do about that.  The experience they have at CC will determine whether they come back to Wynn....
    • If CityCenter cuts prices it will hurt them
  • Increases in expenses can be attributed to utilities/etc rest was seasonal and revenue driving (ie variable as a result of higher revenue)
  • What they expect in additional costs when Encore Macau opens?
    • They are very room constrained, more rooms will allow them to capture more mass market shares
  • What will they do with the IPO proceeds?
    • Protect himself from a dollar that is getting creamed... he's very worried about the depreciating dollar ... will hedge the weakening dollar.
      He sounds like Keith McCullough and the Burning Buck
  • Klatzin asks the question again... in a different way ... Hey Steve will you buy anything with all that cash?
    • Asia seems to be a better bet now.  Uncertainty in the US economy is devastating, and that impacts all of their decisions
  • Visa restrictions in Macau?
    • All the talk of about visa restrictions is becoming quite irritating, all media hype and noise
    • 50% of their visitors are from mainland china
    • Oct holiday was very strong and the period post holiday was seasonally slower as usual. Oct was good
    • "We don't feel uncertainty in Macau"
  • What about Singapore?
    • If the central government thought that Singapore was a threat to their gaming enclave, they change visa restrictions (and taxes)
    • Doesn't think that they lower tax rate in Singapore, and hence the ability of junkets to give higher incentives, will not be a threat to Macau
      • We are worried about Singapore... I wish someone asked the question on what % of Wynn's visitors come from SE Asia 
  • Cotai?
    • They are working on the project but won't discuss it until they are ready to
    • When I was there at the end of Sept there was nothing going on at the site
  • No comment on Acqueduct
  • Any changes to the government policy in Macau?
    • Use the visa program to balance quality of life for people living and working in Macau and the business well being in Macau
  • Corporate expense - little lower than where its been running? Comment
    • Yeah and SG&A was higher - which more than offset that decrease... can you say re-allocation?
    • Payroll cuts and cost control efforts - don't assume that that is a good run rate either
  • Dollar commentary and desire to get less exposure to that... what is he implying?
    • In the past they have converted all their foreign profits into USD ... re-evaluating that
  • Lots of projects/ land available in Las Vegas - any interest?
    • Until there is more certainty in the US they will not be expanding in the US
  • How much of the cost reductions we saw earlier this year will be sustainable
    • Garth Brooks in the 4Q09 - big deal
    • Bought him a jet so that he can come and go
    • First 20 shows are sold out, attracting a lot of people to Las Vegas that haven't come in a long time
    • Entertainment has been the trickiest thing to get right in this business... so bottom line they spent a lot of money on that
    • Other than that things should trend flat from here 
  • Accounting question about WYNN Macau 
    • NI attributable to non-controlling holders right below the NI line
    • Don't you wish that sell-side analysts understood basic accounting?
  • What will become of Fontainebleau?
    • Disconcerting to have half complete projects all around them
    • Another shot at Sheldon - sites 5 & 6
  • "Cosmopolitan is another pending disaster"

UA: Look to History

Hey UA… Here’s a recommendation for you… if you’re gonna suggest that Footwear, your hugest future revenue growth driver, is going to be flat next year, you may actually want to add that color to the press release.  No matter. What’s my view? As noted several times, the one potential shocker to this quarter would be increased SG&A growth to build a footwear organization. The company gave us that today. Given the strength of 3Q revenue – by a long shot – it simply did not matter to 3Q, and I don’t think it will matter much to 4Q either.


The salt in the wound came when UA noted that sales associated with that investment would be flattish next year. I don’t buy it. I think its McCarthy buying time, and keeping his hurdle low. This is not just my ‘gut’ (a gut is something that’s tough to invest with for me), but rather analysis based on historical precedent. Let’s look at McCarthy at Timberland.


He joined in May 2006 and was charged with the task of heading up the flailing ‘Yellow Boot’ business. This was about a third of sales, but 2/3 of profit – and was headed nowhere but down. He halted the decline over 2 quarters. He then grew the business for a year in the mid-single digits, while the rest of TBL shrunk by close to 10%. So of course, TBL pulled him away from the newly branded ‘Authentic Youth’ business, and made him co-president of the Company, while it took resources away from his former division.


The point here is that I agree that it will take some time for McCarthy to make a mark at UA, but the clock started ticking in August. UA will be selling product made under a process that is not his through April/May, and then ‘The McCarthy Product Transition’ kicks in for fall – not 2011 as the company suggests.


The company suggests about $0.97-$1.00 in earnings next year. We’re at $1.20. Then we’re at $1.75 the year after. 40% CAGR in earnings and cash flow? That doesn’t stink.


Conference call starting out strong.  October looks better than people may be expecting in both Macau and Las Vegas.



Steve Wynn stated that Q4 in Macau and Las Vegas will be up over last year assuming rebounding trends in October persist.  We had already projected that but the opening tone of the call sounds pretty positive.


The other item of note is that Macau Encore is coming in under budget.

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Chart of The Week: Rate Rotation

We have 3 Macro Themes that we work with quarterly. From an investment process perspective, these investment themes are generally born out of one another (for example, in Q1 we had Breaking The Buck and come Q3 that morphed into Burning the Buck).


Our views of the deflation/inflation cycle have been expressed via our Q3 Theme of Reflation’s Rotation (reflating prices from their lows of y/y deflation) and now what we are calling for in Q4, a Rate Rotation (born out of accelerating y/y growth and price data).


Politicization of the US Federal Reserve aside (which you shouldn’t set aside), the two things that the Fed should care about in setting rate policy are:

  1. Growth
  2. Inflation

On the Growth front, at this point a monkey can tell you that Q4 GDP will be positive. On the Inflation front, the monkeys still need to be fed more data.


Altogether, GDP and CPI are lagging indicators, so we need to have a proactive forecast that bats at a higher average than the dismal forecasting one held by Bernanke’s stint  at the helm of the US Federal Reserve.


In terms of reported y/y deflation, the July 2009 CPI report of -2.1% is going to be the low for this part of the cycle. The October and November CPI reports are going to continue to be less deflationary, sequentially, and the bond market is already figuring this out.


Recently, TIPs and Gold have already traded at their YTD highs, discounting that reported deflation is a rear-view concern. As a result, now we see interest rates starting to discount the Fed hike that we have been calling for. Yesterday, the Fed futures had an 86% probability baked into the cake for a hike to 0.50% by the April 2010 meeting.


Only a month ago, probabilities weren’t betting on a hike until Q3 of 2010. Goldman still has NO hike for 2010 as their call. We’re on the other side them.


The question now is how right are the moves in both the 2-year and 10-year yields that Andrew Barber and I have outlined in the chart below? The two lines that matter most in our Macro model on this front are the TAIL lines. The TAIL, in our language, is the longest term duration that we use to manage risk (3 years or less).


The TAIL breakout line for the long end of the curve has held up since the US stock market started reminding the Depressionistas that this isn’t a Great Depression in April/May. On the short end (2-year yield) is where you see fits and starts of breakdowns and breakouts –this is called the politicization of the short end of US policy making.


When Bernanke finally signals that ZERO isn’t a perpetual policy, expect 2-year yields to blast off from this 0.98% level. A Q4 Rate Rotation is finally underway.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Rate Rotation - a1



Very solid quarter but it's all about expectations.  Conference call should be somewhat upbeat.



Wynn reported what we thought were pretty solid numbers and handily beat the street's EBITDA for Vegas and Macau.  The numbers were pretty much in-line with our expectations, absent some high hold in LV and low VIP hold in Macau.  It's clearly all about expectations, though, and the stock action this morning clearly indicates that investors had hoped for better.  This is somewhat surprising since the Macau number should've been easy to estimate within +/- 5% and Las Vegas wasn't a disaster.  That's what happens when you trade at north of 15.5x 2010 EBITDA.  No surprise that MGM is down on WYNN's price action since we're pretty sure people are expecting a big number when they print next Thursday.



3Q09 Details

WYNN reported revenues of $773MM and $198MM of property level EBITDA , beating our revenue number by $3.6MM and our EBITDA number by $1.2MM.  Wynn Las Vegas EBITDA was $6.5MM above our estimate while Wynn Macau was $5.4MM below our estimate.



Las Vegas net revenues were $324MM vs our number of $307MM, and EBITDA was $70MM, $6.5MM better than our estimate.

  • Table drop was 5% lower than our estimate, however, higher hold more than made up the difference.  While 23.7% hold is within WYNN's normal range of 21-24% and actually below 3Q08 hold, in only 2 of the last 7 quarters has Wynn reported hold above 21%.  We were assuming a lower normalized hold in the 21% range given the fact that customers are gambling less and for shorter periods, thereby decreasing the average hold rate to 19.7% over the last 6 quarters. Using a 21% hold rate,  we estimate that revenues would have been $14MM lower and EBITDA would have been $6.8MM lower than reported numbers.
  • Slot win was $2.7MM below our estimate due to weaker slot drop -- 1.6% worse than our estimate and slot hold was 20 bps lower than 3Q08.
  • Hotel revenues were in line, however, occupancy was 6% lower than our model while ADR was $15 per night better at $210
  • Other F&B, entertainment, retail and other non-gaming revenues were strong, coming in $9MM above our estimate


Wynn Macau results were below our estimates with revenue $14MM below our estimate and EBITDA $5.4MM below our estimate.

  • VIP gross table win was $14MM below our estimate due to lower hold of 2.8% vs our "normal" rate of 3%
    • The 20 bps point hold differential would have resulted in $28MM of higher revenues and $10MM of incremental EBITDA
  • Mass table revenues were in line with our numbers
    • Wynn removed some more Mass tables for the 6th consecutive quarter
  • Wynn's slot revenue was disappointing, but some of that may be attributed to disruption of the slot floor reconfiguration and removal of 100 slots in the quarter
  • The addition of a new high-limit gaming salon with 40 machines opened ahead of schedule and the opening of two new private gaming salons with 29 VIP tables is also opening one quarter ahead of schedule


Other details:

  • SG&A (net of corporate and stock comp) was $6MM higher than we modeled, while corporate was $5MM lower.  This was due, we suspect, to some reclassification of expenses related to the Wynn Macau IPO

US Strategy – Heightened Volatility

The VIX  was up 9.7% yesterday and moved through and closed above its immediate term TRADE line of 24.13, which implies a break out on a short term duration and signals a heightened volatility environment on the margin.


On Monday, the S&P 500 closed at 1,066, down 1.2% and 3.2% over the past week.  Yesterday’s down day for the S&P 500 was on big volume which is bearish and notable since most major down days we have seen in the past three months have been on lower volume.     


The tight correlation between the US dollar appeared to be the catalyst behind the reversal in the S&P 500 from the positive open, as the dollar index was down on the day. 


The recovery trade was put into question as Financials, Materials and Energy were the worst performing sectors.  According to StreetAccount, there were reports that Senate leaders are negotiating to gradually phase out an $8K tax credit for first-time homebuyers; the XHB declined 1.5% on the day. 


Today we are waking up to the news that more countries are increasingly pulling back stimulus measures.  Specifically, Norway is likely to raise its interest rate by 25 bps tomorrow and India will begin its exit from monetary stimulus measures.  U.S. policy makers continue to lag their global brethren in the easing of stimulus, but can they be far behind? 


Yesterday, five sectors outperformed the S&P 500 and every sector was down on the day.   For the second day in a row, the three best performing sectors were Technology (XLK), Consumer Discretionary (XLY) and Consumer Staples (XLP), while Energy (XLE), Financials (XLF) and Materials (XLB) were the bottom three. 


Consumer discretionary was the best performing sector on Friday.  Again, the breadth of the outperformance was not particularly impressive, as the bulk of the outperformance was again driven by RSH and AMZN.  Media and housing related names were the biggest underperformers in the index.


The Materials and Financials were the two worst performing sectors yesterday.  The Materials (XLB) fell more than 2% for a second straight day on Monday, as the dollar rallied for the third straight day.  Within the XLF, the decline in the regional banks continued yesterday, and have now fallen four out of five trading days.


Today, the set up for the S&P 500 is: TRADE (1,066) and TREND is positive (1,013).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 4 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations are Energy, Technology, Consumer Discretionary and Consumer Staples.     


The Research Edge Quant models have 2% upside and 0.5% downside in the S&P 500.  At the time of writing the major market futures are flat. 


The Research Edge MACRO Team.



US Strategy – Heightened Volatility - s pperf

US Strategy – Heightened Volatility - chartoct27



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