McCullough: This is What Deflation Leads You To


On Monday's edition of The Macro Show, Hedgeye CEO Keith McCullough explained that he's a loud & proud member of the "late cycle" camp ahead of Friday's jobs report and that long-term bond bulls have benefited from the Fed's deflation fears.


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Takeaway: Finally, a good quarter in Vegas. Favorable US outlook (RevPAR) and profit enhancement plan could lead to positive earnings revisions


  • Domestic resorts was $1.7 billion, an increase of 4% compared to the prior year quarter. 
  • Growth across the entire US portfolio 
  • Domestic resorts increased 6% with a 6% increase in RevPAR at the Company's Las Vegas Strip resorts compared to the prior year quarter
  • Wholly owned Adjusted Property EBITDA up 11% driven by growth at our Las Vegas and regional resorts
  • MGM China's net revenue was $557 million and Adjusted EBITDA was $132 million, decreases of 33% and 37%, respectively, compared to the prior year quarter
  • CityCenter's Adjusted EBITDA related to resort operations was $84 million, a 4% increase compared to the prior year quarter.
  • Diluted earnings per share for the second quarter of 2015 was $0.17 compared to diluted earnings per share of $0.22 in the prior year quarter.
  • Sequential margin improvement in China 
  • Profit growth plan to take up to 10 months, and provide sustained growth. 
  • Economy seen growing, but at a slow pace. They want to outpace the market and grow faster. this plan is a challenge for themselves. they brought in outside help. 
  • Profit growth plan well help leverage assets, and reduce expenses, improve purchasing power, and use better analytics and technology
  • Tremendous work to be done, but the plan will offer new and refreshed views on how to grow out and perform better than peers 
  • Process is about empowering employees, and improving the guest experience. 
  • Initiatives will be rolling out in 2016 and 2017. 
  • The plan is expected to result in $300 million of annualized Adjusted EBITDA benefit.  The Profit Growth Plan commenced in July 2015 and it is expected to begin to show results as early as the second half of 2015 and be fully realized by the end of 2017.
  • They think margins can come back to the 30% level 
  • Will continue to drive value for all. Very enthusiastic about these developments 
  • Strip = 6% revpar growth
  • Margins +120bps 
  • All segments seeing increases
  • Convention business up YoY, expected it to be flat  
  • RevPAR up 9 and 14 at off strip properties 
  • Should see strong convention bookings going into 2H and FY2016. 
  • Now expect to outperform last year
  • Q3 strip RevPAR should be 6% - Street was expecting only flattish to slightly up, differs from analysts' surveys
  • New theatre project at Monte Carlo to cause one time charge of $6 million per Q in 2H. 
  • Corp expense up slightly in Q3. $60-65mm 
  • MGM China earned net revenue of $557 million, a 33% decrease compared to the prior year quarter;
  • Main floor table games revenue decreased 23% compared to the prior year quarter
  • VIP table games revenue decreased 43% due to a decrease in VIP table games turnover of 54% compared to the prior year quarter, while hold percentage increased to 3.2% in the current year quarter compared to 2.7% in the prior year quarter;
  • Market share seen increasing sequentially 
  • Continue to maintain costs and drive margins 
  • Win dropped by 23% YoY at MGM China
    • Declined by 5% sequentially 
  • Added 61 high limit slot machines on main floor
  • Record high 80% coming from mass segment 
  • Shifting VIP tables to Mass. Mass now 60% of total tables
  • Strategy is driving incremental main floor visitation
  • MGM China paid a $120 million final dividend in June 2015
  • Should finish MGM Cotai in Q4 2016. Construction remains on track. 
  • Bellagio margins were the best on the strip
  • Crystals leading the way in the retail space
  • New expansion at Mandalay Bay opening later this month, demand has been very strong
  • Monte Carlo new 5000 seat theater set to open soon 
  • Cite strong airline passenger growth, and ability for more capacity as tailwinds for 2H and into 2016
  • Cite that there is a value gap between how the market and management values the company, but see very good prospects in the future for this value gap to close
  • Must narrow the field to determine what is best for shareholder across all timelines

Q & A


Profit growth plan? $300 million pledged, how much is operating expense related and how much for the strip?

  • Not looking for quick fixes. Instead, looked through hundreds of ideas, and devised implementation plans. Trying to create sustainable change. 
  • 1/3rd of money is revenue uplift
  • 2/3rd of money looking to change the way they do business. 
  • Majority pledged for the strip. 
  • $225 million for strip 
  • $25 million for regional properties

Would expect to see margins benefit?

  • Yes that is the key focus. And along with this plan, they are also bullish on the macroeconomics behind the future of the strip. 
  • FTE's still down 15% since 2007. And they will remain down. Growth process is just a plan to show they can do better, because they know they can do better. 
  • Labor savings are in the cards due to the upgrades they will make 

How early can we see results and when? Profit reinvested in the business?

  • Can provide more color next Q. But each project has a project leader, and they have separate teams on each project. Big projects will be felt in 2016, and be accretive in 2017. 

Mirage on the market? PNK assets valued at 30% premium to yours?

  • Mirage not on the market. Will not just put a for sale sign on their properties. 
  • Asset values of the strip clearly show that waiting and not selling has been the right move. 
  • Tremendous interest for strip real estate. Continue to meet people that are qualified. 
  • Highly confident this valuation gap will close going forward. 


  • Should decide on that by the end of the year.

Able to sustain growth next year? Since the comps will be tough. 

  • Will continue to add more events, concerts, fights, etc in the future to maintain competitive edge. The fight actually hurt flow through by 400bps. Look to improve flow through but margins are the most important. 

Macau: Stabilization on the Mass side. Given changes to smoking bans and govt policies. Do you see the market growing or a share shifting game playing out? How do you intend to grow?

  • Critical to re-engineer their process along with the opening of Cotai.  

FTE savings due to the opening of the new property in Cotai?

  • Absolutely, lots of consolidation and process engineering. Difficult times giving them the opportunity to be challenged and better their processes. That is definitely the silver lining during these difficult times. 

MGM sees themselves in a position of unique strength. Predictability of cash flows. 


6% RevPAR guidance of Q3? Similar scale for luxury to non luxury?

  • Yes, likely to see a similar mix to RevPAR growth. 
  • Convention business a tailwind, macro environment a positives. 

Striving for 30% margins across all the properties? 

  • Yes, should see this growth across all properties. Many initiatives that look to weed out extra costs, everything from how their linens are cleaned and maintained to actions across the F&B segment of the business. 
  • Looking to push out the middle man and go straight to the source for food and beverage needs to drive margins. 
  • FedEx and Coca Cola have been helpful through these "improvement plans"
  • Will continue to update details each Q. 

Strategic alternatives? JV's? Color on future opportunity?

  • Reno sale, was a right fit transaction. 
  • Existing JV's? Not many left, but looking to continue to use them to return cash to shareholders. Cited City Center as main driver. 
  • An expansion of Crystals is very likely due to the 2 acres of land nearby. Actively having these discussions. 
  • Other JV's aren't really of strategic focus at this point. 

Chinese baccarat customer seen hurting other operators? How did this play out for MGM in LV?

  • Domestic side of business did very well, and was a big help. Table games ex. baccarat did very well. China source play continues to weaken. 
  • Best quarter ever from domestic business (since 2007). 
  • Plenty of events really attracted domestic customers. 
  • July off to a great start as well. 

RevPAR guidance a little high? 

  • Strength is largely underwritten by convention business. 
  • Clientele is strong. Tech companies and healthcare companies are customers going into 2H. 
  • They believe they have competitive advantage to accommodate broad based wants and needs of companies 
  • Retail and leisure business in Q3 should be strong giving seasonality, overlayed with convention business gives them the confidence that RevPAR will be around 6%. 
  • Room rate surveys are useful, but very tough to use for Q3 due seasonality. 
  • They see strong RevPAR growth for Q4 as well.



  • CEO Colin Reed citing strong group and transient demand, which led to record setting Q2. A common theme being reiterated by hotel operators 
  • EBITDA margin growth of 160bps, to 34.5%, best hotel margin they have ever reported. Best EBITDA margins since the opening of Gaylord National 
  • Tough comps to blame for the soft RevPAR
    • Same Store RevPAR +3.1% YoY 
    • Same Store total RevPAR +4.5% YoY
    • Hospitality revenue +4.5% YoY
  • Boosting dividend by $0.05 to $0.70 p/s for Q3 2015, and annual dividend to $2.70 p/s, a 23% increase YoY
  • Volatility in the peer group and within their own stock. Discusses how RevPAR revisions added to that group wide. 
  • The cycle? Business is in good shape, not experiencing a systemic slow down. 
  • High confidence for the future
  • Business operating better than ever as show in the total revenue numbers
  • Best Q2 revenues, better than Q2 2008, their all time high. 
  • Bookings appeared down for Q2? 530K gross room nights booked, compared to 640K in 2014. 
  • Very tough comp, which led to YoY decline 
  • Production still over 3,4,5 year averages
  • +145K more room nights booked for 2016, up roughly 10% YoY
  • 2016 is looking to be a very strong year based on these booking numbers 
  • Booked 130k gross room nights in July vs. 82K last year
  • Negatives, only real threat is supply or companies like Airbnb, but they do not see supply as a real threat. They do not see Airbnb as comp. Their guests are big groups and serve a different experience.  
  • Very good time to be in the group booking business. High demand and limited supply growth. 
  • Gaylord Opryland rev up 9%, best single Q in EBITDA margins ever roughly 38%
  • Accelerated room renovations, will finish all in Q3. Will hurt Q3, but will be very good for Q4 and 2016. 
  • Gaylord National suffered a little due to tough comps from 2014, and a large group cancellation.
  • Expanding outdoor meeting space and ballroom, should help establish property on the east coast
  • AC hotel performing very well. $1 million contribution to EBITDA
  • Gaylord Texan +25% increase in adjusted EBITDA
  • room renovation completion last year has really helped its perfomance. on track for a record year
  • Gaylord Palms performing very solidly as well. Q3 will challenging due to the fall of Jewish holidays. Q4 looking very strong. 
  • Q3 tracking to be better than last year based on group bookings. 
  • Total group production 2.1-2.3 million room nights for 2015, forecast 
  • Entertainment business - continued growth, expanding and developing new content is the goal. have engaged consultants to help grow this segment. tough to be more specific than that. 
  • Attrition up due to a couple group cancellations, not a systemic slow down. 
  • No debt maturities till 2016. Reduced exposure to floating rate debt going forward. 
  • Guidance down, RevPAR trimmed. Due to challenging calendar and room renovations the main reasons for these adjustments but Q4 should be very strong. As a result they are not adjusting overall profitability guidance for FY2015. 
  • BS/CF in great shape, looking to continue growing the dividend. 


Q & A 


Consultants for the entertainment business? Plans to sell/spin the business off? 

  • No, not yet. These are plans to make it better. Will revisit plans after the consultant advises what changes need to be made.

Booking window lengthening or shortening? What are meeting planners doing?

  • +145K more room nights booked for 2016 vs. last year booking into 2015. For group bookings into next year relative to last year, a big increase
  • Meeting planners, corp segment seeing huge growth. 
  • Booking windows remain the same. But groups increasing outside the room spend.
  • Seeing good last minute bookings, especially from the pharma industry
  • Outside the room spend seen offsetting declining RevPAR. But RevPAR should bounce back in Q4, due to more transient and group booking still left to made. 
  • Continue to reiterate how strong 2016 is shaping up to be. 

Where are the rates on the group bookings for 2016? 

  • Modest increase. But, due to the clientele outside of the room spend should be strong. 

Issues in Texas or energy areas? Is that the attrition you witnessed? 

  • No, it was groups "getting ahead of themselves and having to cancel"
  • No weakness due to energy groups. Gaylord Texan had a good Q. 

Thoughts on renovations?

  • Trying to do them in short bursts. Has temporary effects, but has historically shown good things for future rate growth. 
  • Renovation puts roughly 18K room nights out of order. 

Did you have to turn away groups due to the Opryland renovation? 

  • Yes, but we made sure it was smaller groups. And made sure this was the best time to do the renovation. August just happens to be the best month for that. 

Anything that city leaders are doing to drive for tourism for Nashville?

  • City leaders are very committed to improving the appeal
  • Problem the city is having, is that they are creating so much demand, and the infrastructure will need to catch up to accommodate that.  
  • But for now the demand is very strong and healthy

Weakness in DC?

  • Not seeing a weakness at Gaylord National. Q3 should be strong. Not seeing issues. 

Oil and Gas group is how much of your business?

  • Work hard to diversify. Probably less than 5%. Not an issue. Have many large groups to pull from. 

Bookings to decelerate going into 2H of 2015? 

  • Should see some but not much, still some available inventory. Q1,Q2,Q3 2016 are looking very good. 








































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Takeaway: The Fed's 3Q15 senior loan officer survey shows ongoing easing in business & consumer lending, both mortgage & non-mortgage.

C&I Seeing a Bump to More Easing and Mortgages Continue Significant Easing


The Fed released its 3Q15 Senior Loan Officer Survey yesterday afternoon. The survey was conducted between June 30 and July 14 and covers lending standards and loan demand across business and consumer loan categories.


The survey results were largely positive. In most categories, lenders continue to report net easing of underwriting standards, falling spreads and rising borrower demand.


The one slight negative for the quarter was that standards for construction and land development CRE loans crossed the zero line into net tightening in 3Q15, but only by 1.4%. 


Here are the two main takeaways this quarter:


1. The net % of banks easing C&I lending standards rose in 3Q15. 7% of banks eased C&I credit standards for large firms in 3Q15 versus 5% in 2Q15. Additionally, 6% of banks eased C&I credit standards for small firms versus 1% in 2Q15.


The chart below looks at the historical C&I lending standards (LHS) juxtaposed against the S&P 500 Financials Index (RHS). C&I lending standards have historically begun tightening ahead of peaks in equity prices. We've highlighted in green the periods during which Financials stocks are rising. In the 1990s it was clear that lending standards were tightening by early-1999, suggesting the roll was near. In the 2003-2007 period standards began to tighten steadily in 2007.


There are two important takeaways here. First, inflections in this series lead turning points in Financials equity prices. Second, underwriting standards tend to be autocorrelated, meaning they trend in the same direction for a long time before reversing. This means that once the turn begins you can ride the trend for a long time.




2. Ongoing Resi Easing. Lending standards among underwriters of Fannie and Freddie guaranteed loans continued to ease in 3Q. FHA/VA standards also eased in the quarter. One of the central tenets to our longer-term bull case on Housing is that underwriting standards will continue to ease in the coming years as the credit pendulum works its way back to center.




Now, A Quick Review of the Senior Loan Officer Survey by Category:


C&I: Easing Resumed

Last quarter we called out C&I as a potential canary in the coal mine. That's because the net percentage of lenders tightening standards was almost back to the zero line. This matters because, historically, net tightening of credit conditions has preceded (and arguably, precipitated) all three recessions since the survey's introduction.


As such, we were very interested in whether the 3Q15 survey would show a continuation of that trend. It turns out that it didn't. C&I lending standards eased at a faster clip in 3Q than they did in 2Q. 


Moreover, demand from both large and small firms for C&I loans increased in the third quarter.








CRE: C&D Tightens (Slightly)

Back in 4Q13, the Fed split the CRE category into four new survey components: C&D Lending, Nonfarm nonresidential lending, and Multifamily lending. C&D lending actually saw a small net percentage of lenders tightening standards -- a first in the post-4Q13 era. We wouldn't get too excited about it as it was only 1.4%, net of lenders surveyed that were tightening, but the trend signal is what matters to us.


Meanwhile, the lending environment for nonfarm nonresidential and multifamily CRE loans improved in the third quarter as banks eased standards. 


Demand for all three categories of CRE loans increased in the third quarter.






Residential Mortgage: Easing

Starting in 1Q15, the Federal Reserve broke the survey's residential Prime and Nontraditional categories into six new categories and kept the Subprime category for a total of seven different categories. The six new categories include: (GSE-Eligible, Government, QM non-jumbo/non-GSE eligible, QM jumbo, Non-QM jumbo, and Non-QM/non-jumbo). The categories we're most interested in are the GSE-Eligible (Fannie/Freddie) and Government categories (FHA/VA) since these two categories account for ~90% of all origination volume. The GSE-Eligible category showed 11.3% of banks, net, eased standards Q/Q in 3Q15. Additionally, Government showed a 5.1% net easing. Four of the other five categories also eased.


We pay little attention to the demand component of the Fed's Survey because it reflects shifting refi demand and isn't a good barometer for purchase activity. Nevertheless, we include both charts below.






Consumer: Easing

Standards for credit cards, auto loans, and consumer loans ex-cards and autos all eased in the third quarter.








Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



The Macro Show Replay | August 4, 2015







August 4: 10:00am: NCLH 2Q CC Webcast Link Here

August 4: 10:00am: RHP 2Q CC

August 4: 11:00am: MGM 2Q CC ; PW: 0575269

August 4: 11:00am: H 2Q CC ; PW: 73409721

August 4: 5:00pm: AWAY 2Q CC

August 5: Studio City opening date unveiled during media tour

August 6: 6:00am: G13.SI 2Q CC

August 6: 8:30am: MPEL 2Q CC ; PW: MPEL

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)

August 7: 11:00am: Hedgeye Macau Call 


Leisure and Resorts World Corp. - City of Dreams Manila casino resort in the Philippines, is independently to open this year between 10 and 15 retail gaming outlets for either bingo or online games in that country.  The company operated – as of the end of last year – a network of around 90 bingo sites and about 50 “e-games stations” licensed by the Philippine Amusement and Gaming Corp (Pagcor), according to a media report on Monday. 


Takeaway: We think this property will experience a nice ramp through 2016


NCLH - Norwegian Cruise Line's expansion into Asia is now on the schedule.  The 13-ship brand today announced it would offer sailings in the region starting in 2016 on the 2,348-passenger Norwegian Star.  Norwegian says the vessel will operate out of Singapore and Hong Kong as part of a seasonal deployment that also will include Australia and New Zealand sailings out of Sydney and Auckland, New Zealand. 


Takeaway: This confirms our comments from the July 15 Leisure Letter.  


CCL -  Seabourn has revealed the rendering of one of the most distinct onboard venues aboard its newest ultra-luxury vessel, Seabourn Encore.

  • The Grand Salon is set to debut in December 2016. According to company reports, the main show lounge will present a sophisticated setting for onboard performances, from new shows by seasoned entertainers to local, cultural productions from ashore and guest speakers from the line's popular enrichment series, such as legendary American journalist Dan Rather and Forbes Media Chairman and Editor-in-Chief Steve Forbes.  
  • Seabourn Encore will feature modern design elements and innovations consistent with the line's reputation for understated elegance. The 40,350-GRT ship will be configured with one additional deck and expanded public areas, and is expected to carry just 600 guests, based on double occupancy. In addition, every suite will feature a private veranda.


Takeaway: Seabourn continues to raise the bar for luxury cruises. 


Macau Junkets - The slump in gaming has reduced the number of VIP gaming promoters serving Macau to 148, about 30% fewer than two years ago, Business Daily reports, citing an estimate by the Association of Gaming and Entertainment Promoters of Macau.  The newspaper quotes association president Kwok Chi Chung as saying: “This number is about 60 fewer than the peak time of about 213 VIP gaming operators in business in the city back in 2013, when Macau had robust gaming results.” 



Macau GGR Share - Sands China Ltd retained the biggest slice of Macau’s casino market last month, Business Daily reports.  The market leader had 23.8 per cent of gross gaming revenue.  Galaxy Entertainment Group Ltd had 22.6% of gaming revenue, SJM Holdings Ltd 20.3%, Melco Crown Entertainment Ltd 14.2%, MGM China Holdings Ltd 9.7% and Wynn Macau Ltd 9.4%. 



Macau Labor Dispute- A group of more than 30 local construction workers went to the Labour Affairs Bureau, complaining that they have been unfairly dismissed. The group of Macau residents said they were hired more than two months ago by contractor Shing Lung Construction and Engineering Company to work at SJM's Cotai property – Lisboa Palace.  They say they received a phone call on the 31st of July saying that they no longer needed to go to work.  Some workers say that non-resident employees are now working there, adding that the company is hiring some illegal workers as well.  Shing Lung Construction and Engineering Company told, Macau News outlet, TDM that the workers in question have been hired by a subcontractor and not by them directly.



River Cruises - Low water on the Danube is continuing to disrupt river cruise itineraries, forcing cruise lines to cancel cruises, change itineraries and bus passengers between ports and ships in order to complete itineraries.  


Takeaway: It has been a challenging summer for river cruise operators. 


Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%