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All Indicators Improved Last Week

In spite of a modest 1% rise in the XLF last week, all 8 of the 8 risk measures we track registered positive readings on a week-over-week basis.  


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies)

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX


1. Financials CDS Monitor – Swaps were mostly positive last week.  Swaps for 17 of the 29 CDS reference entities tightened, while 12 widened, with an average change of -1.7%.  Conclusion: Positive.


Tightened the most vs last week: MBI, AXP, XL

Widened the most vs last week: PGR, AON, MTG

Tightened the most vs last month: MBI, MS, AXP

Widened the most vs last month: ALL, TRV, AON




2. European CDS Monitor – We include a look at European swaps to gauge risk perception across the Atlantic. Swaps for 37 of the 39 reference entities tightened, while only 2 widened, with an average tightening of almost 10%.   Conclusion: Positive.


Tightened the most vs last week: Aviva PLC, Assicurazioni Generali, Banco Espirito Santo S/A

Widened the most/tightened the least vs last week: Sberbank, Caja de Ahorros del Mediterraneo, Investor AB

Tightened the most vs last month: Assicurazioni Generali, Credit Suisse, Aviva

Widened the most vs last month: Banco Pastor, Investor AB, IKB Deutsche Industriebank AG




3. High Yield (YTM) Monitor –High Yield rates fell 16 bps last week. Rates closed the week at 8.44% down from 8.60% the week prior. Conclusion: Positive.




4. Leveraged Loan Index Monitor - Leveraged loans rose steadily last week, closing at 1489 versus 1475 the week prior. Conclusion: Positive.




5. TED Spread Monitor – Last week the TED spread fell 4 bps, closing at 31 bps versus 35 bps last week. Conclusion: Positive.




6. Journal of Commerce Commodity Price Index – Last week, the JOC index rose slightly, closing at 12.6, up just over 3 points versus last week’s close at 9.5.  Conclusion: Positive.




7. Greek Bond Yields Monitor – Greek bonds yields and CDS continued to plateau at a high level.  Last week yields fell 8 bps, ending the week at 1030 bps versus 1038 bps the prior week. Conclusion: Positive.




8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads continued to fall last week, closing at 204 versus 214 the prior week.  Conclusion: Positive.




Joshua Steiner, CFA


Allison Kaptur

Discounting The Obvious

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

-George Soros


Before I went to bed last night, China reported another sequential deceleration in its manufacturing PMI Index for the month of July. I thought to myself – wow, that explains absolutely nothing in terms of how both oil and copper have been trading for the last 3 weeks (UP). However, it explains everything in terms of why Chinese stocks have underperformed global equities for the last 7 months (DOWN). China has slowed.


In Q1 we called this the Chinese Ox In A Box. In our Q1 slide presentation we even had a fancy looking Hedgeye Macro Theme chart that outlined the forecast that PMI readings in the high 50’s were unsustainable given that the Chinese were going to tighten.


So China tightened… and now the PMI reading has dropped -12% over the course of 6 months into the low 50’s (July’s reading was 51.2% versus 52.1% in June)… and next to Slovakia and Greece, the Chinese stock market is the worst performing in the world for the year-to-date.


That, however, doesn’t mean that in the face of a monster 2-month rally in European equities (i.e. the other worst performing stock markets for the YTD – Greece, Spain, etc.) that Chinese stocks don’t have every opportunity to A) mean-revert to the upside alongside global equities or B) show you that they have already Discounted The Obvious.


On the heels of this “bearish” economic data last night, China closed up another +1.3% to 2672 on the Shanghai Composite Exchange, taking its rally from its YTD low established on July 5, 2010 to +13.5%. Chinese equities are up basically in a straight line – closing up on 9 out of its last 11 trading days.


So what do you do with that? Inclusive of this rally, the Shanghai Composite Index is still -18.5% YTD. Economic growth is still slowing, but everything that slows finds a time and a price where it gets baked into the Mr. Macro’s cake. Should you chase it here? Should you short it? Should you do nothing?


Whenever I miss a big move like this, I tend to try my best to do nothing. Particularly if the math in my TRADE versus TREND model isn’t yet clarifying the risk management decision for me. Here are our TRADE, TREND, and TAIL lines for the Shanghai Composite Exchange:

  1. TRADE = bullish, with 2491 support
  2. TREND = bearish, with 2693, resistance
  3. TAIL = bearish, with 2988, resistance

Since the Shanghai Composite closed at 2672 last night, you’ll notice that it’s game time now for the intermediate term TREND in Chinese equities. We’re either at an inflection point where price momentum is making the turn from bearish to bullish, or we’re right where the long term bearish case for Chinese stocks fortifies itself.


Since I don’t have a long or short position in China right now other than long the Chinese Yuan (CYB), I don’t feel compelled to make a “call” on which way this is going to go. I’m much more comfortable letting the macro math tell me what to do. Chinese growth has every opportunity to re-accelerate from here, but it could just as easily continue to slow. The big money on the short side has already been made.


Looking at a multi-factor global macro model for the answer is also going to be critical here. Let’s consider some critical signals relative to the summer of 2008:

  1. Dr. Copper
  2. US Dollar
  3. Gold

Both the prices of copper and gold are all of a sudden doing what they did at the end of July and early August of 2008. Much like it is doing now, the US Dollar was getting creamed (down for the 8th consecutive week last week, taking the USD down -8% since early June) and all of a sudden the “reflation” trade in gold decoupled from that in copper (DOLLAR DOWN equaled copper up, but gold down and a lot of people couldn’t figure out why).


Chinese equities also based and rallied in July of 2008, but that was a sucker’s rally in as much as it was in Copper. Gold and the US Dollar were actually leading indicators for almost everything else going down back then. I don’t see that same setup right here and now, but “betting on the unexpected” can pay the bills. Food for thought on a Monday while we’re all Discounting The Obvious of the China slowdown that’s in our rear-view.


My immediate term support and resistance levels for the SP500 are now 1076 and 1118, respectively. The SP500 hasn’t had an up day in the last 4, so we took midday weakness in US equity trading on Friday as a buying opportunity, moving our allocation to US Equities from zero up to 3%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Discounting The Obvious - cHH


The Macau Metro Monitor, August 2nd, 2010


Reuters sources said LVS seeks to amend its $5 billion credit facility by paying down $750 million of the outstanding $3.9 billion and extending ~$2.25 billion for 2.5 years.  Thus, ~$900 million of the amount outstanding would not be extended.  The paydown piece applies only to those who extend for 2.5 years.  Lenders who extend would receive 75 more bps in coupon to 250 bps + Libor.  Consenting lenders would also receive a 10 bps amendment fee.  The amendment requires 50% approval from lenders to pass.  



MGM Macau has signed a five-year refinancing loan worth $950 million.  The new credit facility consist of a HKD4.290 billion (US$550 million) term loan and a HKD3.120 billion (US$400 million) revolving credit facility, which mature in July, 2015.

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In preparation for the BYD Q2 earnings release on August 3rd, we’ve put together the pertinent forward looking commentary from BYD's Q1 earnings release/call.



Post Q1 Conference Commentary

  • “We’re starting to see a more rational promotional environment in the locals business and we’re very aggressive about our sales pulling back on the promotional activity of our properties early in ‘08, because we felt like that business activity would not generate profitable revenues.”
  • “We’re seeing our customers come more frequently now. In particular, our rated customers are starting to show up more. Now they are still spending less and that’s been the issue throughout and we won’t see a full recovery until those customers start spending more money. But right now, they’re starting to show up more frequently.”
  • “I would say that our belief that the second half of the year will be better and kind of flattish relative to second half last year is really driven by the belief that the business has kind of plateaued, not so much that we expect consumers to really start spending more.”
  • “In our downtown business, it’s a smaller segment for us. It only represents about 12 to 15% of our EBITDA. That business is very well run. The volatility that you see in that business largely comes from fuel costs associated with our charter business there. But absent that volatility, the businesses themselves are very stable and very well run. So, we really don’t see any issues there.”
  • [Louisiana] “It’s kind of picking up at pre-hurricane levels.”
  • “The outlook from Paradise is pretty good.
  • [Borgata] “That property has been very stable and we really see no change in that property going forward, given the ability of the management team to recognize what it needs to do from a competitive perspective--adjust and execute…. I think we feel pretty good about our ability to continue to manage the business at the levels of EBITDA that we’ve seen historically.”
  • [Foxwoods license] In Pennsylvania, I think we would look at a little bit harder and I think the issue for us really again is just how much capital is required before you get the benefit of that investment. We are really kind of attuned to making sure that we either have minimal Capex upfront and have it more timed to when we align with when we will generate the EBITDA or either outright buying the EBITDA at kind of the right multiples.”
  • “Our first priority is to deleverage Boyd and so if we were to refinance Borgata and we were able to extract a distribution of some sort for each of the partners there, the first priority would be to deleverage the company. Any acquisitions that we would do would be along the same lines. We would not be doing acquisitions to kind of all-in-all leverage up the company from a covenant perspective…. We want to run the company kind of four to five times leverage.”


YouTubing Q1

  • “We’ve reduced the year-over-year EBITDA GAAP to 10% in the first quarter and expect a similar EBITDA GAAP in the second quarter before returning to year-over-year growth in the second half of 2010.” 
  • “Our leverage calculated in accordance with our credit facility was 6.5 times versus a covenant of 6.75 times. Our covenant steps up in the second quarter to seven times.” 
  • “Corporate expense excluding share-based compensation for the quarter was approximately $10 million, and that should be a good quarterly run rate for the remainder of the year. Depreciation is estimated at about $150 million for 2010, and Borgata will add about $50 million in total for the final three quarters of the year.” 
  • “Interest expense was approximately $28 million during the quarter and is expected to be approximately $125 million in total for the year. In addition, due to the consolidation, we will include Borgata’s interest expense, which runs approximately $5 to $6 million per quarter. Given the maturity of the existing Borgata credit facility in January of next year, the run rate of interest expense at Borgata will be impacted by any refinancing of that debt.” 
  • “The opening expense recorded in the quarter was related to Echelon. We expect 8 to $10 million for this item for the full year. Share-based compensation is estimated to be approximately 10 to $11 million for the year and the tax rate was 32% in the quarter. From a capital expenditure perspective at Boyd, our forecasted capital needs are primarily maintenance-related and run about 50 to $55 million for the year. And just as an FYI, Borgata’s forecasted maintenance capital runs about 15 to $20 million per year."


In preparation for the MGM Q2 earnings release on August 3rd, we’ve put together the pertinent forward looking commentary from MGM's Q1 earnings release/call.




  • “We’re starting to be able to yield up rates. In the first quarter, we yielded up room rates a little over half the time. But in the month of April, we yielded up rates almost 70% of the time. And we continue to catch premium to the market, both in terms of occupancy and in terms of rate.”
  • “We see also some of the macros in terms of McCarran Airport. The passenger declines have slowed and load factors are moving up, and our contacts with the airlines are promising, particularly for the back-half of this year and into 2011….we still expect 38 million plus visitors to come to Las Vegas this year.”
  • [Convention room nights mix] “So the 14.5% mix is lower than we’d like it to be and lower than we believe it will be next year…. We’re building toward a normalized convention room mix for an annual basis of about 15%.”
  • “Our REVPAR was down 8% in the first quarter. It will be down less again here in the second quarter, probably in the mid to low single digits, and that’s four, five quarters in a row where our REVPAR trends are starting to sequentially improve, and we’re going to be in the black, we believe in the second half of the year for sure in REVPAR….The degree of how positive we are in REVPAR will be determined by the convention business, particularly in the fourth quarter.”
  • “Following the quarter March 31, the company received a tax refund of approximately $380 million and also completed a convertible bond offering, which netted proceeds of 1.12 billion. The proceeds of both of these events will used to temporarily reduce the outstanding amounts under our senior credit facility. The convertible notes were offered at a rate of 4.25% and at a conversion premium of approximately 27.5%. In connection with this offering, we entered into a cap call transaction, increasing the conversion premium to approximately 50% or $21.86 per share.”
  • “Our stock compensation expense in the second quarter is estimated to be approximately $9 to 10 million. Depreciation expense in the quarter is estimated to be approximately $165 to 175 million. We estimate that our gross interest expense for the second quarter is in a range of approximately $280 to 290, again with no capital interest expense expected in the quarter.”
  • [Aria] “For May, we’re forecasting occupancy of 80%.... April was 69%....I would say that we were, in Aria in May for example, might run in the mid 70s midweek and in the low 90s on weekends.”
  • “Maintaining the momentum of strong lead volumes and conversions, we expect to meet our convention forecast for the very first year of operation for Aria at 160,000 room nights. Currently, we have 102 of those room nights on the books. For 2011, Aria has over 46,000 room nights, convention room nights, on the books, and this is a 127% increase of what we had on the books this time last year.”
  • “Several tenants have scheduled to open over the next several months, including such notables as Prada, Christian Dior, Zegna, and Gucci. Now this will result in Crystals being 76% occupied by the end of the third quarter and 82% occupied by year’s end.”
  • “Most of the cost cuts that we made on labor side are permanent, thought we will be bringing people back on a volume-related basis. But our FTEs were down 4% in the quarter I believe versus the first quarter of a year-ago, and our occupancies, as you see, are relatively high. So we don’t expect that labor of course, which is the biggest component of our expense structure, will move up materially. There will be some as it relates to convention business, the FTEs around catering and conventions, but that will be minimal relative to the base of FTEs that we have. So the FTE component will be flat to down for the balance of this year. Our other controllable costs are in very good shape. So we believe that as the revenues are starting to pick up here, that a very high margin of that revenue will come down to profit.”
  • [IPO] "Kind of late third quarter, early fourth quarter.”
  • “I think there are 864 rooms of the 1,525 or so at Vdara currently being operated as a hotel. The remaining 600 and some odd rooms are all under contract, or these apartments are all under contracts. As we process through those, which will be somewhere mid-summer, we suspect that we’re going to close about 175 of the Vdara’s 600 units, and the rest will be returned to Vdara for hotel inventory. So that will make the hotel size approximately 1,350 rooms and about 175 residences.”
  • [Convention room bookings] “865,000 rooms so far we’ve booked, through the first quarter of this year, for conventions for next year….this is same-store number of rooms we have on the books for the calendar year 2011 [excluding City Center]…. Fourth quarter is unclear. We might be down a bit in the fourth quarter, because of some city-wides that are moving in and out. But in a general sense, it looks like, at least for the third quarter, we can say we think we’re going to be up. It looks like we’re going to be up in the second quarter as well, by the way, both in terms of convention room revenue and in terms of room nights.”
  • “So the room rates that we’re getting for this year in the convention block is about what we were doing back in ‘04, ‘05, and the room pricing that we’re getting on conventions for next year is very comparable to what we achieved in a really good year of 2007.”
  • “So as we get closer and closer to what we consider to be full occupancy, which will be in the low-90s given the marketplace currently, we’re not going to be able to drive rate beyond what it is now. And it runs in the $180 to $190 range at Aria, a little bit more at Mandarin and a little bit less at Vdara.”
  • “So we look to make money in the second quarter, and all the various components of CityCenter are going to be at least breakeven or making money by the end of the first quarter – second quarter, pardon me.”
  • “CityCenter, when you kind of look at it in its totality, it doesn’t make much money at 65%. But it starts to make money around 75%, and of course, as you get to 90, you start to make a lot of money.”
  • “Our market share in baccarat, if you pull Aria out, was 38%.  And of course when you add Aria to it, Aria’s share was about 8%, a little over 8%. So our baccarat market share is 46, 47% with Aria in terms of market share. A year ago, our baccarat market share was 37.5%. So our market share has moved up without Aria.”


Here is a look at TXRH guidance going into earnings on Monday.


Comparable-store sales

  • TXRH  needs to post company-owned same-store sales of 1.9% to maintain two-year trends
  • Per Factset, the Street is expecting two-year trends to slow sequentially from 1Q.  Company-owned same-store sales are expected to come in at 0.6%.  Tellingly, the highest estimate of the twelve estimates that make up the Factset estimate is +1.5%.  This would still imply a slowdown in two-year top line trends.
  • Earnings estimates have been holding steady recently, but in the past 6 months have increased 18% on a next fiscal year basis


  • G&A will be tough to leverage without positive comparable restaurant sales for the year
  • Anticipating a tax rate for 2010 of 33%
  • We anticipate continuing to generate excess cash flow and paying down more debt throughout the balance of 2010
  • 2010 EPS growth up 14% to 18% - assuming flat to+1% comparable restaurant sales growth, food cost deflation of 2.5% to 3% and total capex of approximately $50 million
  • Food cost deflation will be less for the balance of the year with the lowest deflation in 2Q
  • April trends were better and management expects this to improve
  • On pace to open 14 to 15 new units this year – slowing growth in 2Q, picking up in 2H



  • All locations in 2010 will include the new kitchen design which is reducing development costs by $100k
  • Plans to open a few locations that are ~10% smaller in terms of square footage – expecting to see these perform well
  • There is no price increase on the new menu and no imminent plans to take price…maybe in 2011
  • Increased seating capacity at 47 locations thus far – 4 in 1Q and doing 6 or 7 for the balance of 2010
  • Close to 100% locked on beef for 2010


Howard Penney

Managing Director

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