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“Good progress has been made over the past quarter at City of Dreams, as we continue to derive benefits from the growth in our patron database and as our various brand building initiatives build momentum.... [At CoD], we are seeing further modest improvement in our mass market business in the third quarter of this year and target a more marked step−up in mass market gaming volumes in the fourth quarter of this year on completion of the final planned phase of amenities at City of Dreams, the highlight of which will be the opening of The House of Dancing Water on September 17, 2010. Altira Macau continues to perform much better under the traditional VIP business model to which we transitioned late last year. Profitability continues to benefit from the commission cap implemented last December. A provision of US$9 million was taken in the reported quarter against an amount due from a former contracting party. This provision is considered to be non−recurring.”

- Lawrence Ho, chairman and CEO




Management Restructuring

"Melco Crown Entertainment is announcing the implementation, effective next month, of a new operating management structure organized along functional as opposed to dedicated property responsibilities, to be led by newly created Co−Chief Operating Officer positions.  Ted Chan, currently the President of Altira Macau, has been promoted to Co−COO, Gaming, overseeing gaming activities across the entire organization....He is currently recognized as one of the leading experts in the VIP customer segment in Macau. Nick Naples has joined Melco Crown Entertainment and has been named Co−COO, Operations. He will be responsible for all non−gaming operating activities across the entire company.... Mr. Naples most recently held the position of Consulting Executive Vice President at Sands China Ltd. and was previously the Chief Operating Officer at Macau Studio City. His prior experience includes positions with Harrah’s Entertainment, Four Seasons, Ritz−Carlton and Hyatt. Both Mr. Chan and Mr. Naples will report directly to Mr. Lawrence Ho."


Conference Call

  • CEO Ho: CoD will drive mass business going forward; optimistic on Cotai in 2011
  • Using normalized 2.8-3.0%-- EBITDA would have been 89MM
  • Operating cost structure similar to peers
  • Will maintain pricing discipline
  • Growth in mass market in July
  • Would like to gain market share in the 4Q
  • Pricing bank facility: LIBOR+250bps (reduce further by 100bps in coming quarters)
  • Blended cost of debt: 6% (low relative to peers)
  • Financial covenants: 4.5x Sr Bank Debt Max and the first calc takes place in 4Q2010 ) pushed out 1Q...minimum covenant
  • 3Q guidance:
    • D&A:  78MM
    • Net interest: 30MM
    • Pre-opening: 4MM



  • Think that when Galaxy and 5 & 6 opens it will help CoD by shifting the center of activity to Cotai from the Penninsula
  • Doesn't think that China is bothered by the growth in GGR in China.  Hearing that visa applications are actually being processed even faster than before. Still early days of these loosening measure. Unclear if this is just a temporary summer thing
  • Japan:  they are interested and staying on top of the potential of opportunity there
  • Mix of RC/ Rev share - they are 80% RC and 20% revenue share. 30% Rev Share at CoD and 10% at Altira.  As an operator they plan to maintain flexible arrangements with their junkets
  • Would like to have 60% of their business coming from Mass in CoD eventually
  • Provided 50% against outstanding amounts with AMA. Think that they have taken the right provision there
  • Macau Studio City?
    • Other than the government sending them a letter to make progress - no change there now
  • Their goal over the next 12 months is just to ramp up CoD, however if Macau Studio City looks available then they are interested and would want to participate
  • Claim that it doesn't matter if hold at CoD or Altira is lower? Altira held 5-10% above their range and CoD was below their expected range
    • CoD higher % of Rev Share mutes hold impact a bit
    • CoD also has a higher fixed cost to operate though
  • What is Restricted cash on the balance sheet is for?
    • $130MM of proceeds from the bond deal was parked to pay down bank loan. $35MM will be paid at Dec 2010, $35MM in March 2011, and balance in June 2011
    • Have $50-60MM of restricted cash which are for making retention payments to construction obligations on CoD - will go away in Sept/Oct
  • Maintenance Capex?
    • $30-35MM
  • Thoughts on growth rates for the rest of the year as comps get much tougher?
    • Still thinks they will see in excess of 30% growth in 4Q
  • New ferry terminal should open in 2013 (Tak On)
  • Pricing of the water show? Why would it be more successful than Zia?
    • Zia was a show already in development at Cirque vs. House of Dancing Water was designed for them and the Chinese customer
    • $50-$200 US admission fee
  • Capex for theatre was $250MM which was already completed; show production itself $60MM. Expects that fully loaded daily cost of manning the theatre and running the show - $100K per day
  • Customer database: over 300,000 now for CoD and target is 450,000 by YE
    • June was a little softer than expected, they saw money diverted towards soccer betting, but 2H July is tracking 10% ahead of 2Q run rates
  • Why don't they shift more towards revenue sharing from RC program to stabilize margins?
    • Claim that their competitors mix some premium mass play into their VIP revenues to inflate hold rate
    • Think that revenue share is generally more expensive in the long term
    • Think that since their goal is to build their non-VIP business it's not a priority or issue for them and would rather offer their junkets flexibility
    • We think the real issue is that MPEL has a lot of more "grind" VIP business and smaller junkets operating at their properties. Smaller junkets can't financially withstand the volatility of Rev Share programs. Hence the mix at their properties
  • They aren't company that chases market share, they are more focused on EBITDA growth
  • We are very skeptical of Dancing Water growing their EBITDA and Mass business significantly... one analyst's 50% suggestion seems absurd - as a result of the opening of amenities
  • Occupancy rate at Grand Hyatt?
    • June was at 80% want to get to high 80's / 90's by 2H2010
  • % of direct VIP at CoD?
    • Just below 20%


This may be good enough. We believe we were the Street high in Macau and Singapore and they came in pretty close. Low hold at MBS impacted VIP by $15MM so they would have beaten us in Singapore and overall with normal hold in Singapore. Here our are notes from the call.


"We are pleased to report that we delivered record revenues and adjusted property EBITDA during the second quarter of 2010. Strong revenue growth, increases in operational efficiency and robust operating margins at Marina Bay Sands in Singapore all contributed to substantial margin expansion and a record financial performance overall. In Macau, we delivered an all-time quarterly record of $307.0 million of adjusted property EBITDA, with each of our properties, The Venetian Macao, Sands Macao, and Four Seasons Hotel Macao and Plaza Casino, delivering substantial revenue and adjusted property EBITDA growth, as well as adjusted property EBITDA margin expansion. In Las Vegas, increases in gaming volumes and hotel revenues, in concert with the impact of our efficiency programs, allowed us to deliver $66.0 million of adjusted property EBITDA during the quarter."

- Sheldon G. Adelson, chairman and CEO



  • In Las Vegas, results are showing some improvement. Occupancies are strong, and weekend business has improved
  • Construction activity on Sites 5 & 6 is progressing. They are working with Macau authorities to ramp workers on the site
  • 963 rooms opened on April 27th and most of the remaining rooms opened on June 23
  • Have seen continued ramp of daily play at MBS since opening
  • Las Vegas- volumes were healthy but they had low hold.  Occupancy was good but pricing was challenged. Forward bookings continue to improve and have started to see better pricing trends on FIT, especially on weekends.
  • Leadership change in Macau - apparently the board made this decision. For at least the last 6 months, they had planned on beefing up the management team in Macau. 
  • Direct VIP play was Venetian Macau was 24% of total rolling volume.  At FS, direct VIP RC was $2.4BN or 49% of total RC. 
  • Retail sales at Venetian Macau were up 56% in June YoY
  • Remain confident that adding "destinations" to sites 5 & 6 will be additive to drawing customers to their properties
  • Sands Bethlehem had its best quarter since opening - efficiency and marketing efforts helped.  July 18th - they introduced 89 table games.  Table games have already positively influenced slot play, total play and other property revenue.  300 room hotel is scheduled to open Spring 2011
  • Las Vegas results:
    • Gaming volume was healthy but low hold impacted revenues by $30MM
    • Expect to realize more group rooms in 2010 than 2009. 2011 should be even better. 18% of total room nights were group. However, rates are still under pressure in the group segment.
    • Gaming business is healthy, costs are down, but rates are still under pressure
  • Deleveraging strategy: Paid down $420MM of debt (ex. Singapore).  At June 30th - had $3.8BN of cash & equivalents on their balance sheet. Had $3.2BN of R/C availability across their credit facilities in US and Macau.  $750MM of capex and pre-opening expenses in Singapore through YE 2010 - although about $400MM of that should be paid out of their cash flow. 
  • They have sufficient capital to complete Phase 1 of Sites 5 & 6
  • Weighted average interest rate in the Q was 3.7%. 
  • US credit facility leverage: $432MM TTM EBITDA, $4.3BN, cash: $1.9BN, 5.47x compared to 6x max leverage
  • Venetian Macau: TTM EBITDA $1.09BN, gross debt: 2.27BN, leverage was 2.09x compared to max leverage of 4x
  • Expect to execute the sale of non-core assets to assist in the deleveraging
  • Launching an amend and extend for their US facility - they will reduce the term loan in exchange for an extension of the facility and financial flexibility



Singapore specific:

  • Monthly progression of gaming win at MBS?
    • There was a substantial ramp from May to June.
    • RC - started around $300-$400MM range per week initially. By the beginning of June, it got above the $600MM range and is now around $800MM. Rolling volume will hit just over $3BN in July.
    • Slot win: May was $2MM+ range per day, then June was 2.5MM, and in late June/July - $3MM/day
    • Ramp in Mass and slots has continued
    • VIP hold has been lower than expected
    • Mass and slot win has been very consistent though
  • Occupancy is still low at MBS but on 2,500 rooms instead of on 1,200 average rooms. July occupancy is a little higher/similar than what it was this quarter. Selling 1,200-1,300 rooms per night. Have been light on corporate business so far.
  • (MBS) Opened up the electronic Bacc - 90 units.  By September 3rd they will have over 300 positions online.  Early results on Baccarrat were lower than expected but results are still ramping as people figure out that they are there.
  • Commission rates at MBS?
    • Thinks that 1.2% is about right on average for rebates. 1.2-1.3% is a good number to use.
  • Market share in MBS now?
    • Don't know Sentosa's numbers. Think that once they are fully ramped that they will have more than their fair share. Genting is doing a lot better than Sheldon initially thought they would do. Their bussing program is good and claim that they are giving 20 bps more in rebates than MBS.
  • Contribution margins of 50-67% at MBS
  • Radius of their marketing reach at MBS is wider than they thought
  • Slightly more than 1/3 visitors to MBS are from Singapore - trend has been steady from the beginning (35-37%)
  • More then $1BN in EBITDA in 2011 for MBS?
    • Think that they can do $1BN, not necessarily more than that
  • Contribution margins for the hotel and casino at MBS:
    • From the hotel it was minimal
    • Casino margin was about 52-55%
    • Think that their overall margins will be north of 50% when they are fully ramped
  • Retail at MBS - will have 160 stores open on Sept 3rd of the 280 stores.  Expect them to begin contributing to profitability. Their current EBITDA has no contribution from retail this quarter.
  • No update on junket applications - they haven't sponsored any.  They don't think that they need any since the demand on the premium side is very strong. Doesn't think that junket reps will get licensed in 2H2010.
  • Thinks that Genting is likely working with junkets given their higher commissions
  • Singapore hold impact was $25-26MM
  • Direct credit hasn't been an issue so far

All other questions:

  • Steve Jacobs departure? Is there a non compete?
    • No he does not have a non-compete. He didn't have an actual negotiated contract - just a term sheet.
    • "I would opt for him to go to work for a direct competitor" - Sheldon
    • No more departures of management teams. Claims they have people wanting to come back.
  • David Sisk: He has many years of very strong casino experience and some significant Macau experience. Think that his personality and skill set will bring attention to the day to day management of their properties
  • Ed Tracy: Has some casino experience - he build himself up from washing dishes to senior management.  Thinks that he's a good operational guy and will help marketing and sales.
  • Thinks that the government will allow them to have the necessary amount of labor that they need since they are hiring all the locals that they can.
  • Macau: July has been a terrific month so far. Will continue the trends of the last quarter ... "or more".
  • They are comping less in Vegas than last year - they're in the mid 20's for comping but comp less than their competitors.  Across the market there is too much comping but also too many rooms. 
  • Hope that they will get to 20% group business in 2010, and hopefully 30% in 2011 but high 20's is more likely
  • Evaluating pulling back direct play in Macau? Why?
    • Because junket growth has been very strong, so why not participate more in that growth
    • Analyzing whether it's worth keeping all strata of premium play because it's chasing away some junket reps from their property
  • CEO search for Sands China: Will pick a search firm tomorrow. Wants a person with Asian operating experience
  • % of roll and the commission that they pay isn't impacted by hold... hmmm not sure that's true
  • Vegas impact from Opryland shift of business?
    • They did help the summer a bit - there were 25,000 room nights or so for them.
    • It was good for Vegas though, but it wasn't highly rated room business because the rates were very low for a part of it.



As we look at today’s set up for the S&P 500, the range is 31 points or 2.1% (1,090) downside and 0.6% (1,121) upside.  Equity futures are trading below fair value following Tuesday's inconclusive close which saw the S&P 500 snap a three day winning streak after US Steel provided an uncertain outlook statement.

Today sees a slew of earnings while the Fed's Beige Book and Durable Goods Orders will be the main MACRO focus.

  • Advance/Decline Line: -360 (-2235)
  • Volume: NYSE 1115 (+9.5%) - Volume is up DoD with negative breadth and but still below LTM average.
  • Sector Performance: 5 sectors up/4 sectors down (RECOVERY/REFLATION trade underperforming)
  • Market Leading Stocks: Lexmark +8.4%, Du Pont +3.5% and Masco -11.7%, Thermo Fisher -9.4%

Equity Sentiment:

  • VIX: 23.19 (2.0%) - The VIX is broken on TRADE - BULLISH for stocks
  • SPX Put/Call ratio: 1.40 down from 1.70 (low on 07/15/10 of 0.87)
  • ABC Consumer confidence declined to -48 from -45
  • Bullish sentiment increases to 38.2% from 35.6% in the latest Investor's Intelligence poll

Credit/Economic Market Look:

  • TED Spread one-day change: 33.029 to 32.911
  •  3-Month T-Bill Yield is at .15% from .14% yesterday
  • Yield Curve one-day change: 2.406 to 2.413

Commodity/Growth Expectation:

  • CRB: 266.66 +0.02%
  • Oil: 77.50 -1.87%
  • Copper: 320.65 (-0.51%) – trading above its TRADE line - BULLISH for growth expectations
  • Gold: 1,159 (-2.1%) - Gold has decisively broken the Hedgeye intermediate term TREND line of support (1197); the long term TAIL of support -4.2% lower at 1115


  • EURO: 1.30 (-0.1%)  - Trading above the TRADE line
  • DOLLAR: 82.05 (0.1%) - BEARISH formation

Overseas Markets:

  • ASIA - Markets closed sharply higher helped by a string of better than expected corporate earnings including Canon and Nippon Steel.  China A-Shares close up another 2.3% last night (up 7 of last 8 days and +12.8% from July 5 YTD low)
  • China could jolt markets on Aug. 1 with PMI below 50, Westpac & SocGen analysts say (Bloomberg)
  • EUROPE - Major indices have pulled back from opening levels and appear to be waiting for the US open, as the benefit from the Asian markets gives way to some minor profit taking.
  • LATIN AMERICA - Major indices are mixed, with Mexico down 0.8%
  • MIDDLE EAST - Mostly higher with the UAE trading down  another 0.60% 

THE DAILY OUTLOOK - levels and trends

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.

Gold Fishies

“What does a fish know about the water in which it swims all its life?”

-Albert Einstein


Gold got clocked yesterday, and I was getting a lot of questions as to why. Given gold’s multi-factor and multi-duration attributes, there are a lot of ways to consider these questions, so let’s take a little risk management swim starting from the top down. Then we can move from the bottom up.


First, from global macro perspective, here are 3 major reasons why consensus loves gold:

  1. Protection against Fiat Fools who run Fiat Republics.
  2. Protection against a deflating US Dollar.
  3. Protection against inflation.

So let’s take these one at a time. What happens when certain Fiat Fools are forced to get fiscal religion? Austerity measures across Europe have provided a huge intermediate term tailwind for both European equities and currencies. The UK in particular is where we’ve had our bullish currency bias (long FXB) and we get how a marginal investment dollar could be allocated to the British Pound here versus US Dollars or gold.


But what about that US Dollar? What do we Gold Fishies know about the waters of down dollar equating to down gold? That’s definitely new – but that certainly doesn’t mean it can’t make sense. It’s happened before – don’t forget that DOWN DOLLAR = DOWN GOLD in the summer of 2008 – and that, my fellow fishies, wasn’t a precursor to a very friendly hootchy-kootchy kiss.


On the inflation front, our call for Q3 is that reported inflation in the US in particular rolls over sequentially versus headline CPI and PPI readings we witnessed at the cycle-highs of Q2. On the margin, that matters – if you are long gold for inflation protection in the intermediate term that is…


Duration is always critical to contextualize, so let’s swim right back up to the top and consider the setup in the gold price from a top-down quantitative perspective using our multi-duration model (TRADE, TREND, and TAIL):

  1. TRADE (3-weeks or less) = 1217 and that line broke in late June.
  2. TREND (3-months or more) = 1197 and that line broke in the last few weeks.
  3. TAIL (3-years or less) = 1115 and that long term line of support continues to hold.

In other words, irrespective of my long term bullish view of the gold price, if all I did was run a quant shop, I’d be shorting gold on strength (it’s immediate term oversold at 1164 this morning by the way) using an 1197 stop, with an intermediate term plan to cover my short position in the 1115 range and get really long again.


To be crystal clear, I am simplifying my analysis this morning because I only have 40 minutes to write this in 1000 words or less. But that’s not something I need to apologize for – quite often when applying the fundamental principles of chaos theory to macro market moves, there is a deep simplicity to the right answer.


For now, the answer is in the math. Over the long term, the DOLLAR DOWN = UP GOLD bulls have been fed handsomely by recognizing the inverse price relationship between these two asset classes. Like anything that gets bubbly, these bullish waters have been purified by a great story – the end of the Fiat Republic. We get storytelling, but we get math too…


Using our intermediate term TREND duration, there are two new mathematical realities that have re-surfaced in the last 3 weeks (mid-2008 style):

  1. There is currently a POSITIVE correlation between the US Dollar and Gold of +0.84
  2. The r-square between gold and USD has shot back up to +0.70

By any mathematical consideration these are very high correlation and r-square levels for the Gold Fishies to consider as we all swim up and down the proverbial fish bowl of risk management that is this interconnected marketplace.


My immediate term support and resistance levels for the SP500 are now 1090 and 1121, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gold Fishies - FISH


The only bright spot in this low quality quarter was free cash flow generation. Lower FQ4 guidance was blamed on software revenue recognition. Wish we had known about that FQ2 Canadian shipment.



While IGT’s $0.21 EPS number technically is in-line with consensus, with the exception of tight cost controls, there was little to get excited about in the release.  North American (NA) unit shipments, NA ASPs, and install base were all disappointing.  FQ2 ship share now appears overstated given a big Canadian shipment which wasn’t previously disclosed, and share appeared to remain low in FQ3. 


Guidance of $0.16 to $0.19 was not good, below consensus estimates of $0.22.  The only bright spots were free cash flow, non-box sales in NA, margins, and lower SG&A.  The S in SG&A has a commission component so it shouldn’t be a surprise that SG&A was low with top-line miss. 


The biggest miss vs. our expectations was on North American box sales which came in $28MM below our estimate, largely driven by lower replacement shipments.  June is usually a seasonally better replacement shipment quarter than March and Konami tends to grab a smaller piece of the pie.  So what went wrong?  Possible explanations:

  • We know that Konami shipped fewer units in the June quarter – about 1,250 less than the March quarter so that’s not it.
  • IGT claims that lower sequential shipments into Canada negatively affected their shipments to North America (they shipped 1,100 units into Canada in the March Q), although conversations with WMS and BYI suggested that there was nothing unusual about the Canadian shipments in March.
  • March industry-wide replacements were simply better than June – We didn’t get the sense that this was the case from speaking to operators throughout the quarter.
  • The introduction of the Dynamix package in the March quarter may have pulled forward some of IGT’s demand.  In the March quarter, IGT sold 4,017 units under the Dynamix package, while selling less than 2,300 units under this promotion in the June quarter.
  • IGT lost even more share – if we back out the 1,100 Canadian units from the March quarter, IGT’s market share would’ve been 22%, instead of 27%.  Had we known about the Canadian shipment in March, we would’ve assumed lower IGT ship share going forward.


Better North American non-box sales helped offset some of product sale weakness and, we suspect, was the major driver of better margins, since it’s not unusual for this mishmash bucket to have margins of 70%.  As followers of BYI know, systems revenue is almost impossible to model given the revenue recognition issues, and IGT gives no quarterly disclosure of the contents of the non-box sale bucket.


Gaming operations revenues came in light of our estimate as did gross margins – although excluding the jackpot funding expense, margins would have been 60.6% - which were only a touch lower than our estimated margins.  The “splendid yield of $51.68” in the quarter, finally showed some stability and even growth – which is encouraging since for at least 5 straight years, yields have declined.  However, given the new exciting games like Sex in the City and Amazing Race, we suspect that most analysts were expecting some stabilization and perhaps even some growth here.  The backlog for mega-jackpots increased by about 200 units sequentially, while the backlog for the “hot” top 4 games decreased by almost 1,000 units sequentially.


While earnings were disappointing, the huge improvement in free cash flow generation by IGT is impressive.  Much of this improvement is due to more efficient capex spend through the reduction and streamlining of platforms, better working capital management, and cost cutting.

UA: Contextualizing Sources for Growth

Following UA’s 2Q call, we see two key incremental opportunities for top-line growth – outlet stores & distribution within existing partners. Below is our analysis sizing each:


One of the two incremental growth opportunities pertains to direct-to-consumer. Sales in this segment are tracking up 60%+ with growth of 17-19 stores on a base of 35 in 2010. Plans call for similar unit growth in 2011. In an effort to size the potential contribution to the top-line consider the following. Taking into account location at premium outlets where productivity is typically $600/sq. ft and an average store size of 5,000 sq. ft. with year-1 productivity at ~75%, we estimate the addition of ~18 stores in each of the next 2-years alone could add $40-$50mm, or 4%-5% annually.


Additionally, growth within existing partners such as Foot Locker also represents meaningful upside over the intermediate-to-long term. For example at Foot Locker, UA can grow through 1) increased door distribution and 2) increased product penetration (i.e. apparel and footwear):


1)  We know that UA is in 700-800 of approximately 2,400 addressable FL stores (excluding ~750 international locations and ~465 Lady Foot Locker concepts – these represent an additional opportunity a few years out). If we assume that each store sells 1 pair of UA shoes/day with a net retail ASP of $70 and retailer margin of 55% (essentially $45 at wholesale), that equates to ~$13mm in footwear revs for UA at FL currently, which we view as conservative. Therefore, the expansion into 1,600 incremental stores represents a ~$26mm opportunity.


2)  The more meaningful opportunity is increasing UA’s market share within FL’s mix. If we take into account the fact that Nike represents 60%+ of FL’s portfolio and no other brand accounts for more than 10%, let’s assume that UA represents only 1%, or ~$50mm of sales at retail. Again, this equates to ~$32mm to UA at wholesale (same retail/wholesale markup assumptions as above). With basketball shoes and gen-2 running shoes imminent, we fully expect UA to become more meaningful to FL’s portfolio. The table below captures just how significant an opportunity this is for UA.  As a reminder, UA is currently a $1Bn business.


It’s clear that we should no longer expect major product launches from the company following its $5mm Super Bowl footwear launch in 2008. There are clearly new products on the near-term horizon in both footwear (basketball and running) and apparel (cotton-based and new fits) that will play a key role in driving double digit top-line growth. Coupled with the aforementioned distribution opportunities, we expect 20% top-line growth over the next 2-years, at least, and remain comfortably above guidance and the Street at $1.19 in 2010 and $1.75 in 2011.


UA: Contextualizing Sources for Growth - UA at FL 7 10



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