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MPEL missed by even more than we thought but the story was not Q4.  Rather, market share and EBITDA rebounded in January and if the trend continues, 1Q2010 results will handily beat the street.




MPEL missed our revenue number by only $6MM or 1.5%, but missed our EBITDA which was roughly 50% below consensus by a mile. The miss was everywhere with the exception of CoD, which is where the potential value of MPEL really lies.  We knew that hold would be bad, in fact, we had correctly estimated hold % at 2.4%.  So what happened this quarter?  While MPEL doesn’t give you the exact breakdown between CoD and Altira, we always try to piece together the numbers given the data.  Below are the details.


City of Dreams

  • CoD revenues were $5MM below our estimate of $243MM but EBITDA at $22MM was spot in line with our expectations
  • Not unlike the Venetian Macau, now that CoD has been open for a few quarters they are realigning their gaming floor to match demand (ie. removing supply).  In Q4, average tables were reduced by 22 and average slot machines were 38 lower than 3Q09
  • RC volume and VIP win was higher than we estimated as a result of higher direct VIP play.  We estimate that direct VIP was 19% of total RC vs. our prior estimate of 12%.  Given the higher profitability of this segment, it is an encouraging trend.
  • Mass win, estimated at $75MM was about $1MM light of our estimate.  We think that hold at CoD was a little better than the 17.5% average hold on Mass
  • Slot handle was $59MM better than our estimate, but this was offset by lower win % of 5.4% vs our estimate of 6% hold. Net net, slot win was $1MM better than we estimated
  • Net casino revenues were $5MM below our estimate, while non-gaming and promotional expenses were in line with our estimates.  The miss on revenues was made up by lower fixed costs and lower expenses on non-gaming revenues.



  • Altira revenues were $5MM below our estimate of $138MM and EBITDA missed our estimate of -$6MM by $8MM
  • In the quarter, average tables were reduced by 16 vs. 3Q09
  • We suspect that slightly better table results at Altira were more than offset by higher discounts & promotional expenses.  Normally we estimate “discounts & other” at .83% of RC for this property, however, this quarter that ratio ticked up to .96% of RC volume
  • Net casino revenues were $5MM below our estimate, while non-gaming and promotional expenses were in line with our estimates.  The miss on revenues was further exasperated by higher costs – some of which were temporary and associated with the switch away form AMA




  • Given the strong January results, and the likelihood of strong February, we raised our EBITDA estimate for 1Q2010 to $95MM on estimated revenues of $583MM
    • CoD:  $330MM of revenue and $60MM of revenues
    • Altira:  $227MM of revenue and $28MM of EBITDA
    • Mocha Slots:  $27MM of revenue and $7MM of EBITDA
  • For FY2010 we are estimating $2.25BN of revenues and $350MM of EBITDA
    • CoD:  $1.3BN of revenue and $268MM of EBITDA
    • Altira:  $825MM of revenue and $85MM of EBITDA
    • Mocha Slots:  $103MM of revenue and $27MM of EBITDA

Risk Management Time: SP500 Levels, Refreshed

Paul Volcker is reminding the willfully blind on the Senate Banking Committee right now that they live and operate in a Bubble of US Politics. His basic message is that everyone at Investment Banking Inc knows exactly what prop trading is, and that it shouldn’t be back-stopped by the government.


In the end, I think the Volcker Rule makes the American Financial System a less volatile and less cyclical place to transact. So, I support Volcker’s basic demand here – get London on board and get it done. That’s my long term (TAIL) view.


For the immediate term TRADE and intermediate term TREND in the SP500, the answer is less clear. I have basically been selling the entire way up this week, and now the SP500 is jumping above what I call the Shark Line (the 1099 line). A close above that line gives my short position in the SP500 pain until 1116, where I plan on shorting it again. All we are doing here is making a series of lower-highs.


A close below 1099 puts 1071 in play on the downside.  



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed - sp22

Brazil Update: Lula's Health

Since he just started reading the local Brazilian press for us in real-time (in Portuguese), Moshe Silver’s Hedgeyes have recently revealed the following risk management takeaways:


1. Brazil’s central bank just released for 90-day comment period a proposal to regulate bankers’ compensation, based on Group of 20 principles accepted last year.  Purpose of the proposed new rules will be to align bankers’ compensation with impact of risk exposure they take on.


2. Lula has been pushing for his right-hand Cabinet Chief, Ms. Dilma Rousseff – a former anti-government guerrilla during the military dictatorship – to become his hand-picked successor.  She has now formally accepted, which means she will stand for her party’s nomination during their convention this month.  Lula, who can’t run again now, has made his choice plain.  Her reported surge in popularity in the last few days maybe “inside information” function of her formally saying she wants the job. 


3. Lula was hospitalized for emergency high blood pressure episode on 28 January.  His doctors were monitoring him during the day on the 27th.  The Brazilian market was down that day – maybe a leading indicator from Lula’s doctors’? concern for his health?


Rousseff is still being treated for cancer that first surfaced in the press a few years ago.  She says it’s in remission, but obviously this would be a bad time for both Lula and his hand-picked successor to have severe health crises.


With all of this “news” in the rear-view, it’s easier to understand why the intermediate term TREND line for the Brazilian Bovespa is under assault. That line of support = 66,624. All the while, the long term TAIL of support for Brazilian equities remains intact down at 55,406. We have outlined these risk management levels and durations for you in the chart below.


Moshe and Keith


Brazil Update: Lula's Health - bovespa


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%

Short Natty

Position: Short natural gas via the etf UNG


In the last few days, we’ve laid out a few shorts in the commodity world.  We shorted the XLE, which comprises the major U.S. based energy producers, and yesterday we shorted UNG, the natural gas etf.  The thesis behind both of these positions is slightly different as oil is driven by global drivers, while natural gas is a localized, North American market.


Despite the fact that Punxutawney Phil saw his shadow this morning, which, according to the urban legend, means we will experience six more weeks of winter, winter is basically in the rear view mirror, and sequentially demand for natural gas should decline seasonally as it usually does.  This year the seasonal impact will be particularly pronounced as we’ve just experienced one of the more seasonally cold winters in reason history.  That, too, has become consensus.  As we wrote on January 11th:


“Cold weather is good for the price of Natural Gas, we definitely get that.  We also get that the idea of cold weather is becoming a solidly consensus notion.  Consider the following headlines that are currently posted on the drudgereport.com:

  • Cold Stuns Floridians, causes deaths elsewhere;
  • Arctic air has invaded the south;
  • Cold kills 100,000 tropical fish in S Florida;
  • Chill Map;
  • Cold snap death toll rises across Europe;
  • Global cooling may set in for 20 – 30 years; and
  • Feds: December was 14th coldest in 115 years.”

As of now, there is less winter in front of us than behind us, so natural gas should begin building inventory as demand naturally declines.


Currently, inventory in the U.S. is still well above normal levels.  According to the most recent natural gas update from the DOE:


“Working gas in storage was 2,521 Bcf as of Friday, January 22, 2010, according to EIA estimates. This represents a net decline of 86 Bcf from the previous week. Stocks were 120 Bcf higher than last year at this time and 87 Bcf above the 5-year average of 2,434 Bcf.”


While natural gas did see a weekly decline in the most recent numbers, inventory levels are still very high and the price of natural gas is still roughly ~15% higher than it was a year ago. With higher inventory and higher price, something has to give.


The recent increase in the price of natural gas that we’ve seen as of late has been leading to an increase in drilling activity as well, which is negative for future price in a time when both inventory and production are still high.  According to the Baker Hughes rig count, they see an addition of 36 rigs to the fleet in the United States and 35 rigs to the fleet in Canada week-over-week.   On a year-over-year basis, the United States rig count is still down on a year-over-year basis, though Canada, which is a major producer and exporter to the United States of natural gas, is up by 99 rigs.


Below we’ve outlined a chart with our current levels on UNG, the natural gas etf.



Daryl G. Jones
Managing Director


Short Natty - natty


RL: A Huge Beat HAS TO Happen

RL: A Huge Beat HAS TO Happen


Tomorrow’s print should show that RL will earn ’11 EPS a year early. The sentiment suggests that the market knows this. But RL remains in bullish TRADE and TREND with upside to $86.11... not a short yet per KM’s risk management models.


It’s been a while since my confidence on a name has been so birfurcated heading into an event as I am with RL’s 3Q (Dec) EPS.  On one hand, RL will absolutely blow away the number tomorrow. We’re modeling $1.28 vs. the Street at a buck. Similarly, our 4Q estimate is $0.96 vs the Street at $0.79.  Top line is turning on the margin (helped in part by newly consolidated Asia business), both revenue and margin compares are increasingly easy, and capital intensity is easing. When all is said and done, RL should earn the Mar’11 Street estimate a full year early and make people look to $5.50-$5.75 in EPS power in Mar ’11.


So what’s not to like about that? Hardly anything. In fact, RL is one of the poster children for a company that invested in its P&L and balance sheet over the past two years when the world was falling apart. Yes, it took it on the chin with margins, but now will enter harvesting mode and show outsized growth in revs, earnings, cash flow and returns.


With names like this, we’re increasingly not valuation-centric. Why? They DESERVE to be expensive. A global brand name with a bullet-proof balance sheet and a proven track record for executing a simultaneous top and bottom line-driven mid-teens EBIT growth rate and 20%+ RNOA?


What do you pay for that? History shows us that RL is a typical ‘feast or famine’ apparel company in that when times are tough it is valued as a lowly apparel brand, but when it is beating expectations it is quickly valued as a luxury brand. Today we’re looking at the latter. If I take my estimate – which is a moonshot above the consensus, it suggests about 17-18x p/e, or about 15x on March ’11 numbers. This also equates to about 8x an above consensus number 2-years out.


Is this justifyable? I think so. But with more Buy ratings than anytime since June 2007 (8 Buys, 6 Holds, 0 Sells), short interest resting at the lowest level since Dec/07 and having just come down precipitously over the past six months (now at 6%), and with management as net sellers above $80, it’s pretty darn tough for me to justify adding to any position here. Even though we’re expecting a monsterous beat, we’d like to see it be a more controversial one to play on the long side.


But before getting cute on the short side, keep in mind that the positive fundamentals will be there, and Keith’s models suggest that RL remains in bullish TRADE and TREND with upside to $86.11.


-Brian McGough



RL: A Huge Beat HAS TO Happen - rl1


RL: A Huge Beat HAS TO Happen - rl2


RL: A Huge Beat HAS TO Happen - rl3




For the intermediate term TREND (3 months), we are bullish on the jobs picture, but we need to get past Friday first.  The upcoming revision to the official number of those unemployed and non-farm payroll data create a political football that the Obama administration does not need right now.


The economic downturn has been the deepest of the post-World War II era.  Generally speaking, the post-war environment has been one of growth, with most government reporting structured on an underlying assumption of ongoing economic growth, not the “Great Recession.” 


The stress of the extreme economic downturn is creating problems with the government reporting system. Those problems include:


(1)    The lack of reporting data due to companies going out of business.

(2)    An economic decline so severe it’s affecting normal seasonal variation patterns. 

(3)    One-in-three home sales is a foreclosure sale.

(4)    The federal government taking effective control of auto makers, banks and insurance companies.


The likelihood that traditional economic models will produce an accurate picture of current economic activity has deteriorated.


This will become more evident this Friday.  In more “normal” times, payrolls not reported by companies because they have gone out of business are more than offset by jobs created by start-up companies.  The excess jobs creation from start-ups is an estimate from five years of historical data, which includes “normal” periods of economic growth.   The economic climate of 2008 and 2009 has changed the payroll reporting dynamic.  As a result, the BLS will publish next week a downward revision to May 2009’s previously reported payroll level of about 800,000 or more.   That means the official number of unemployed since the start of the recession will be bumped up from the current 7.6 million to 8.4 million people.


If the traditional BLS (government) quote is understating the severity of the Job picture, what is the chance that the government is overstating the strength in the economy?  I would say strong.  I said last week that most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  With the GDP figure coming on the heels of the State of the Union speech it was certainly a welcome headline, but negative for the market. 


The better than expected GDP number was dollar bullish which is a negative for the REFLATION trade; the S&P 500 closed down 0.98% on the day.  We are agnostic to this Friday’s jobs data.  An improving unemployment picture puts upward pressure on interest rates and is dollar bullish, bearish for the market.  A bad jobs number is a political nightmare for the Obama administration, which is also dollar bullish and a nightmare for the market.      


Howard Penney

Managing Director




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.