Feed the junkets is the plan and we think it will work – at least for market share gains. 



We’ve written a few posts on MGM’s strategy to boost its Macau market share ahead of the planned IPO.  It’s been our belief that if management can elevate market share and revenues, even at the expense of margins, they MAY be able to sell a future EBITDA level based on a higher revenue run rate.  Of course, while it’s easy to “buy” revenues, you can’t “buy” profits.  We’ll see if investors “buy” the future EBITDA story.


MGM Macau recently hired Mr. Kwong away from Altira to run the VIP operation as part of this strategy.  Mr. Kwong is known to be very aggressive in compensating the junkets to focus on the top line rather than the bottom.  The property recently brought the junket operator David Star to operate a VIP room.  David Star maintains a sizable operation at Wynn.


So how aggressive are they?  We are hearing that David Star is getting in excess of 55% revenue share, but they are also responsible for the costs of the room, including staff and property expenses.  This deal would be similar to the Golden Group room in Grand Lisboa which is based on the deals at the SJM 3rd party casinos.  We estimate this structure provides a margin of roughly 5% for the casino versus a mid-teens margin for the property’s standard VIP arrangements.  


MGM Macau is also being aggressive with regards to the advanced front money, essentially credit, with a number of HK$500m being mentioned around town, although it’s unclear if this is just for David Star or spread around the other rooms as well.  Many of the casinos will offer up to 50% of the expected revenue share/commission based on historical performance and we are hearing that MGM is pushing between 75% and 100%--so considerably more.  This should not be considered a long term strategy and we doubt MGM is planning to be this generous for more than necessary to boost their numbers ahead of the IPO.


So how is it working so far?  In terms of volume share, we think the September numbers will show gains.  Hold percentage has been subpar so far in September so revenue share may not have kept up.  However, look for a big jump in Q4.


While management seems set on a Q4 deal, we still think the most prudent strategy for MGM would be to wait until they have a few months of market share gains under their belt before they price the IPO.  That would be put the timing in Q1 of 2011.


Last week, 4 of the 8 risk measures registered positive readings on a week-over-week basis, with one negative and three netural/mixed.  A summary table is provided below.


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 mixed last week.  Swaps tightened for 19 of the 29 reference entities and widened for 10.    Conclusion: Mixed.


Tightened the most vs last week: SLM, MBI, AIG

Widened the most vs last week: LNC, MET, HIG

Tightened the most vs last month: JPM, UNM, XL

Widened the most vs last month: WFC, AGO, MMC




2. European CDS Monitor – In Europe, CDS was mostly positive.  Swaps tightened for 36 of the 39 reference entities tightened and widened for only 3.   Conclusion: Positive.


Widened the most/tightened the least vs last week:  Bank of Ireland, Banco Santander, Banco Pastor

Tightened the most vs last week: Soc. Gen., Commerzbank, National Bank of Greece

Widened the most vs last month: Bank of Ireland, Assicurazioni, DnB NOR

Tightened the most vs last month: Deutsche Bank, Alpha Bank, HSBC




3. High Yield (YTM) Monitor  High Yield rates fell 4 bps last week, ending at 8.46 on Wednesday, the lastest day for which pricing was available. Conclusion: Positive.




4. Leveraged Loan Index Monitor – The leveraged loan index rose 6 points last week.  Conclusion: Positive.




5. TED Spread Monitor – Last week the TED spread fell slightly, coming down by two basis points. Conclusion: Positive.




6. Journal of Commerce Commodity Price Index – Last week, the index fell just under 1 point, closing at 13.07 on Wednesday, the latest day for which pricing was available. Conclusion: Neutral.




7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 17 bps, ending the week at 1156 bps versus 1173 bps the prior week.  Conclusion: Neutral.




8. Markit MCDX Index Monitor – Spreads were up slightly last week, closing at 227 versus 218 the prior week. 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. Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur

Trojan Protection

“The best lightning rod for your protection is your own spine.”

-Ralph Waldo Emerson


On Friday President Obama introduced Elizabeth Warren as the new head of the US Consumer Protection Agency. Sounds serious. We hope that she’ll be working vigilantly to protect us from more policy making ideas coming out of Larry Summers and Timmy Geithner.


Hope, of course, is not an investment process. So the best we can do for your protection this morning is recommend you take your financial security into your own hands – in the face of government sponsored volatility, sell high - buy low.


If you thought last week was a big week for Government (Congress was back in session), this week is going to be a barn burner:

  1. Monday - kicks things off with an “exclusive CNBC” town-hall meeting with none other than the President of the United States as 12PM EST today (I couldn’t make that up if I tried).
  2. Tuesday - Heli-Ben is going to save us all from the road that is US monetary policy perdition at the FOMC meeting that will be brought to you by Trojan’s NEW “Fire & Ice Quantitative Easing”, twice the turn on!
  3. Wednesday – both the Senate Banking Committee and weekend at Barney’s House Financial Service committee will be back in action.

Some people take the alleged Trojan horse protection Ben Bernanke provides us very seriously – if you think about it in terms of the world’s poor who are watching food prices rip higher again this morning, it’s very serious indeed.


Bernanke’s “Warped Twenty Ten Tour” (Trojan) has been a battle. He started the year talking about US GDP growth accelerating into the back half of the year on the order of 3.5-4%. Now that US GDP growth is barely 2%, you can fully expect him to downgrade his growth estimates tomorrow. In modern day risk management speak, we call this chasing your own tail.


Protecting their own tail is what people in Washington do. This isn’t new, and you don’t need CNBC to provide the sponsor’s messaging to understand this either. Today is just another day in the Fiat Republic. Prices are a lot higher than where they were only a month ago, so now is not the time to be buying those inflated prices.


On a sequential basis versus August, inflation in September has re-reared its ugly head. Expect Ben Bernanke to mention none of this tomorrow. If he didn’t see inflation in 2008, he’s certainly not going to see it now. These things are very hard to see from a helicopter.


Interestingly, but not ironically, Bernanke’s counterpart at the Reserve Bank of Australia, Glenn Stevens, pre-empted Heli-Ben’s political pandering by saying the following in Victoria this morning: “If downside possibilities do not materialize, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy.”


Now if you are part of the perma-Deflationista camp, you probably don’t like these trivial things like prices going up being mentioned as inflation. Heck, how should we expect one of the next alleged great leaders of the Fiat Republic like Republican Senate candidate, Christine O’Donnell, ever see anything but deflation in US home prices since she stopped paying her mortgage in 2007?


Never mind 15 year highs in cotton prices this morning or all-time highs in the nominal price of gold – the deflation story-telling is entrenched – and Elizabeth Warren is going to protect all consumers from those evil-doer gold commercials anyway.


Last week saw further deflation in the US Dollar Index’s price. The US Dollar continued to look like the credibility of the government that backs it, losing another -1.6% of its debauched value week-over-week and closing down for the 13th week out of the last sixteen.


In response to the Dollar DOWN trade that Ben Bernanke has been hired to perpetuate, most asset prices inflated week-over-week, including short-term US Treasury bonds. As we look at 2-year yields dropping to generational lows this morning of 0.47%, Americans with hard earned savings accounts in this country must be wondering whether Elizabeth is going to protect us from Japanese style fixed income rates too…


As Emerson dares me to have the spine to sell my 6% asset allocation to Gold (GLD) this morning, I think I might just do it. That’s right - I have my own protection strategy against Government.


My immediate term support and resistance levels for the SP500 are now 1113 and 1137, respectively. On Friday, I sold 3% of our 15% position in the Chinese Yuan (CYB), taking our asset allocation to Cash up from 46% to 49%. Unlike prior bear market rallies, we have plenty more to sell into this one.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Trojan Protection - TROJAN

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The Macau Metro Monitor, September 20th 2010


Peter Johns, who was the the Director of Slot Operations at MGM Macau, will start his new job, Vice President of Electronic Gaming at Galaxy Macau, at the end of next week.  AGI believes a possible delay in the opening of Galaxy Macau will mean less risk of MGM Macau losing its VIP slot players.

Nathan Carle, Slot Operations Manager at MGM Macau, will replace Mr. Johns.


Acting CEO Leven says Sands has enough qualified candidates to hire a new CEO by the end of 2010.  The new CEO must have worked in Asia and is "culturally sensitive."  Meanwhile, local lawyer Leonel Alves has been rehired as a legal advisor by Sands China.

The Secretary for Economy and Finance, Francis Tam Pak Yuen, says that the local MICE industry “seems to be on a rise, but there are still problems and obstacles standing in the way of further development.”
Mr Tam stressed that, “in recent years, the government of Macau has been vigorously promoting the MICE industry and other service sectors so as to moderately diversify the economic structure of the economy of Macau.”
“Together with the completion of better hardware, including spacious convention halls, starred hotels and luxury resorts, Macau’s strategic geographical location and tourism resources have made the territory increasingly appealing to organizers of MICE events,” stressed Mr Tam

The increment was attributable to notable increases in direct taxes from gaming and other current revenue, up by 63.9 percent and 50.9 percent respectively, that was contributed by increasing gross gaming revenue.
Direct taxes from gaming totalled MOP40.91 billion.


TODAY’S S&P 500 SET-UP - September 20th, 2010

As we look at today’s set up for the S&P 500, the range is 24 points or -1.12% downside to 1113 and 1.01% upside to 1137.  Equity futures are trading higher with focus on the FOMC meeting tomorrow. Oil & Gas, Chemicals and Basic Resources sectors are among the gainers in Europe helped by gains in metals prices. Today's macro highlights include: NAHB Housing Market Index.

  • American Apparel (APP) was granted an extension until November 15 by the NYSE Amex LLC to meet listing standards
  • BP (BP) killed its Macondo well in the Gulf of Mexico after creating another cement seal, plugging the source of the largest offshore oil spill in U.S. history
  • Diamond Hill Investment Group (DHIL) will pay a special dividend of $13 a share.
  • Lionbridge Technologies (LIOX) said COO Satish Maripuri resigned
  • Nicor (GAS) agreed to acquire assets of the shipping business V.I. Cargo Services
  • OpenTable (OPEN) may drop after Barron’s said its shares are overvalued, having doubled since February.
  • Petrobank Energy and Resources (PBEGF) may rise as production increases and demand for its efficient drilling technology expands, Barron’s said.
  • Roma (ROMA) said it may buy back as much as 5% of its shares.
  • Ruby Tuesday (RT) entered into a licensing agreement with LFMG International LLC to open and operate up to 200 Lime Fresh Mexican Grill restaurants.
  • Spark Networks (LOV) may be an attractive takeover target as investors discover the value of its business, Barron’s said.
  • Time Warner’s (TWX) “The Town” opened as the top move at the North American box office over the weekend



  • One day performance: Dow +0.12%, S&P +0.08%, Nasdaq +0.54%, Russell +0.56%
  • Month-to-date: Dow +5.92%, S&P +7.27%, Nasdaq +9.54%, Russell +8.2%
  • Quarter-to-date: Dow +8.53%, S&P +9.21%, Nasdaq +9.78%, Russell +6.88%
  • Year-to-date: Dow +1.72%, S&P +0.94%, Nasdaq +2.05%, Russell +4.17%



  • ADVANCE/DECLINE LINE: +554 (+1039)
  • VOLUME: NYSE - 1856.09 (+104.83%)  
  • SECTOR PERFORMANCE: Only two sectors up on Friday - XLI and XLK.  Markets initially opened up on carry-over enthusiasm behind RIMM +0.5% and ORCL +8.4%, but indices quickly returned to near flat on the release of MACRO data which provided further evidence of a slower growing economy.  The decline in the preliminary U of Michigan Consumer Sentiment surprised the downside. Materials, Utilities and Consumer Staples lagged.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Oracle +8.28%, Interpublic +4.78% and SLM Corp +4.46%/Massey -7.48%, Tyson -6.87% and MICRON Tech -4.37%
  • VIX: 22.01 +1.34% - YTD PERFORMANCE - (+1.52%)          
  • SPX PUT/CALL RATIO: 2.40 from 1.03 +133.41%


  • TED SPREAD: 14.75 0.304 (2.107%)
  •  3-MONTH T-BILL YIELD 0.16% unchanged
  • YIELD CURVE: 2.27 from 2.29


  • CRB: 279.65 +0.34%
  • Oil: 73.66 -1.22% - Traded down 4 of 5 days last week; down 3.65% for the week.    
  • COPPER: 352.20 +0.82% - Oil and copper are telling different stories; up 3.39% for the week
  • GOLD: 1,276 +0.32% - Treaded up 4 of 5 days last week; up 2.64% for the week


  • EURO: 1.3050 -0.18%
  • DOLLAR: 81.398 +0.19% 



  • European Markets: FTSE 100: +1.18%; DAX: +0.69%; CAC 40: +1.02%
  • European markets opened higher in a broad based move as investors take on more risk. 
  • In an absence of any significant international news flow, M&A continued to dominate headlines after Safran and BAE Systems announced a deal to carve up US securities firm L-1 Identity Solutions.  
  • Rising metal and commodity prices helped lift basic material plays, while BP rose after it said it had finally killed its leaking well in the Gulf of Mexico. 
  • Gold hits another record high of $1.283 an ounce.  


  • Asian Markets: Nikkei (closed); Shanghai Composite (0.4%)
    Asian markets were mixed today in cautious trade, as every day this week will see at least one market closed for a holiday. South Korea and China will close for three days each.
  • Taiwan went up. Sinopac rose 1% when Taiwan’s financial regulator approved MOUs between it and a Chinese partner.
  • South Korea opened down, but ended posting a small gain.
  • Hong Kong finished little-changed. Large-cap property developers gained 2% as property prices are not falling even as transaction volumes do.
  • In low volume, profit-taking in banks and miners took Australia down, though recouped most of their losses in light trade by the time the day ended.
  • Losses in pharmaceuticals were partially offset by gains in banks in China.
  • Japan was closed for Respect for the Aged Day.
  • The yen is trading at 85.66 to the US dollar.
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Apparel: We Just Got More Bearish

An aberrational margin lever turning a 180 should expose the ‘play nice’ posturing we’re seeing among apparel companies today for what it is – smoke in mirrors.  We’re more bearish today on the Global Apparel Supply Chain and its components than we were just one week ago. Favorite names on the short side remain CRI and JCP.


Not a conversation goes by without an investor asking about cotton. Most notably, at conferences this week management teams across the board largely downplayed the impact of higher prices on their bottom line. We’re seeing wholesalers (CRI), Retailers (JCP, KSS) and Sourcing companies (Li&Fung) all acknowledge the price pressure, but the consensus amongst them is that the consumer will ultimately pay a higher price.


There are several reasons why this absolutely will not happen. History shows how the industry has coped with circumstances like this in the past. But this time, history is history.

a)      We religiously track product spreads at the consumer level vs. import cost level. Like it or not, the positive spread between the two (due to tight inventories and low input costs) has given the industry meaningful pricing power. We are just coming off an event where input cost margin impact was 3 Standard Deviations above the mean. That’s about $10+bn up for grabs in a $280bn industry. Most CEOs don’t acknowledge this (due to no Macro process) even though they unknowingly live it every day.


Apparel: We Just Got More Bearish - 9 17 2010 9 10 00 PM


b)      While we’re talking 3-SD moves, look at the recent move in cotton. Yes, the recent spike puts it into the ‘statistical aberration’ bucket. Anomalies or not, it is an economic reality, and a 50% boost in the industry’s biggest cost input must be dealt with.


Apparel: We Just Got More Bearish - 10 Year Cotton Chart


c)       What kind of numbers? As we highlighted in our note where we outlined the bear case on CRI, the recent boost in input costs suggests that a $10 item ultimately needs to sell at retail for closer to $11.50 to keep margins for everyone even. No way that’s gonna happen.


d)      Elasticity works both ways. One thing that people often do not realize is that there’s a sea change in the basic economics of this industry. I know that ‘sea change’ sounds sensationalistic, but numbers and facts are tough to exaggerate. Consider this…

  1. This industry works in a highly elastic pricing model. As price comes down, velocity goes up. I know… that’s common sense.
  2. With few exceptions, virtually ALL of the units imported into this country are ultimately bought. It might be at a 90% discount 6 months after they hit the initially hit the floor, but they all sell.
  3. In 1992, 50% of apparel we consumer was made in this country. At that time the average American consumer 42 units per capita.
  4. In 2008, the percent of consumption that was imported hit 99%. By that time Americans purchased 64 units per capita.
  5. What does this tell us? Over nearly 2 decades, savings from outsourcing and offshoring were passed through to the consumer, and we ‘bought more stuff at lower prices.’ When demand eased, the industry still had a $3-$4bn safety net of sourcing savings to pad margin pain. This allowed the velocity to remain high without degrading margins.
  6. Now there’s no more kitty – in fact with the rise in input costs there’s a big deficit. Ideally, the industry would be controlled and rational, and would all take down orders in unison by 5-10% to maintain price. But in an industry that has thousands of brands and millions of SKUs – this would a near-impossible expectation.


e)      One of the more common themes I've heard from those in attendance at this week's conferences is that management was much more benign about cost increases than expected. Not a surprise, actually. Seriously...  Are talking heads from all facets of the supply chain going to gather at an investor conference and turn it into a battle royale as to which of their peers are going to pick up the tab on the margin deficit? No. They’ll flash their pearly whites and stand largely as a united front. The battle royale starts when the CEOs don't have to look one another square in the eye. They'll be unified until the first player with any power flinches. Then everyone else reacts.


So what have we got? An aberrational margin lever turns a complete 180. Companies are playing nice in the sandbox today, but their behavior is not genuine. We’re more bearish today on the Global Apparel Supply Chain and its components than we were just one week ago. Favorite names on the short side remain CRI and JCP.




While demand from Chinese, American, and European consumers grows for cotton, the core driver to cotton nearing $1.00 per pound is supply (though the fact that just about every commodity is on fire is a big contributing factor).  We all heard management teams talk about how they were hoping August and September crops were going to be wrong, but hope is not an investment process. Here are the issues over the last month that has kept supply well behind demand:

  • Crop quality and quantity has been negatively affected by weather across the globe
    • Low temperature and excess rain in China is dimming the prospects of a strong September harvest
    • Longer monsoon period is causing delays in Indian picking period
    • Floods and landslides destroyed Chinese crops in July and August
    • Mexican cotton output was reduced from fungus killing the crop from excess rain
    • Pakistan floods destroyed nearly 30% of the cotton crop and derailed infrastructure
    • Political/legislative pressures limiting cotton production and exports
      • India halted cotton exports in April to cool domestic prices and bolster supplies but has continued to push back the resumption of exports from September to October


Aside from the supply-demand balance we are seeing two other major issues: higher energy and wage costs for cotton production and higher shipping rates to transport finished product to consumption destinations. Cotton inputs of land rent and value of seed increased 17% since 2007 while labor costs are increasing in China and India with those inflating economies.  The shipping industry is experiencing the same supply-demand imbalance driving freight higher and higher as we've heard on numerous conferences calls in 1H 2010.


Here’s an overview of the general flow of cotton from production, to manufacture, to end market.



Apparel: We Just Got More Bearish - Production  Manufacturing  End Use


Apparel: We Just Got More Bearish - Cotton Uses


Apparel: We Just Got More Bearish - Cotton Production Tree


Apparel: We Just Got More Bearish - Cotton Price Growth



Zach Brown

Apparel Analyst

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