Some sort of equity deal was inevitable.  Now that everything is on the table, was it worth a 50% move in the stock in the past month and a half?



The Good:

  • Wholly owned property EBITDA was about $21 million higher than we had projected, but likely in-line with the recently elevated whisper numbers.
  • Aria pulled in $41 million in EBITDA, $10 million higher than we thought.
  • MGM secured a bid for Borgata at about 7.25x our 2011 estimate which looks like a very good price for MGM
  • MGM will get paid the $125 million receivable out of MGM Macau in October and not have to wait for the IPO
  • MGM Macau EBITDA was $83MM in the quarter and we think hold was actually low. 4Q promises to be another strong quarter – which is all good for selling the IPO and yielding net proceeds to MGM at the high end of their expected range.  We will have a follow up note with more details.
  • Raising equity will improve liquidity
  • Jim Murren will get paid another big bonus for raising all this cash

The Bad:

  • Hold percentage was higher than midpoint of normal hold
  • Aria hold percentage was very high.  Normalized EBITDA would’ve been $26 million lower, missing our estimate by $16 million.
  • Kirk Kerkorian thinks the price is right to take a lot off the table.  He may be old but he isn’t stupid
  • Shareholder dilution

The Ugly:

  • Strip Baccarat volume grew 39.6% and 87.2% in July and August, respectively and MGM posts a decline in Baccarat volume (not including Aria) of 6%?  September must’ve been a disaster.  Remember that MGM ripped up 15% the day the August Nevada numbers came out.
  • After seeing these numbers, I’m not so sure that Las Vegas has really improved that much.  What’s the next catalyst?
  • MGM trades at 13x our 2011 EBITDA estimate.  With the cat out of the bag, I’m hard pressed to find a reason to buy this stock here.
  • The company will pay Jim Murren another big bonus for raising all this cash

Inflation Wars: Snorting QE

This note was originally published at 8am this morning, October 12, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"I didn't even like coke that much, it was just a case of getting on whatever train I needed to take to get high.”

-Carrie Fisher


On many levels, the Big Government American Life of the late 1970s became a scary place. As consensus gets paid to snort QE and blow its mind on whatever M&A machination they can dream up because “money is cheap”, please remember that we’ve seen government sponsored trailers to this movie before.


In 1977, as Jimmy Carter was being sworn in as President of The United States and the Fed’s Chairman, Arthur Burns, was finishing his experiment of monetizing US Treasury debt, “Star Wars Episode IV: A New Hope” came to the big screen. In the meantime, Princess Leia (Carrie Fisher) was snorting lines of cocaine on the set of “The Empire Strikes Back.”  


If you didn’t know that’s what was going on behind the scenes, now you know. Yesterday, in the spirit of Columbus Day, the now 53-year old Fisher admitted that she didn’t even really like doing coke, but she was quite happy to get high anyway.


Hope, of course, is not an investment process and neither is chasing this market higher in the face of what you really know is going on. Inflation is running up again. Both companies and consumers alike are starting to get squeezed.


Before you have a “New Keynesian” who got submarined by stagflation circa 1981 send me a reply explaining how everything is “deflationary”…  but earnings for the companies my buddies and I are long are “going to be great”…  but “we need QE3 anyway”… let’s look at some real-time prices:

  1. CRB Commodities Index hit a new YTD high yesterday for 2010 (up +13% since August!).
  2. Copper prices are up +28% since August and are now testing their all-time peak prices of 2008.
  3. Chinese stocks have rallied +20% since their July lows.

China, Copper, and Commodities? Yes, Dear Congress person, these are what we call demand drivers of long term secular inflation that are augmenting your Burning of the Buck as you provide the stimulus for Jobless American Stagflation.


Now please don’t take my word for this concept of long-term secular inflation. Have all of your analysts read pages 180-201 in Reinhart & Rogoff’s ‘This Time Is Different.’ Chapter 12, “Inflation and Modern Currency Crashes”, is very timely reading when you consider the history of global inflation going back to the year 1500.


Yes, going back that far in time is a long time. But so is life and, as Rose Bertin aptly put it, “there is nothing new except what is forgotten.” The chart on page 181 of the median inflation rate, using a 5-year moving average, tells you all you need to know. Ever since the world convinced itself that the US should be trusted to debauch the world’s reserve currency, prices have gone up.


In today’s world inflation is, like politics, a local phenomenon that’s backed by the credibility of the government who oversees its currency. So let’s strap the accountability pants on and snort down some local inflation readings from this morning:

  1. UK Consumer Price Inflation (CPI) was reported at +3.1% year-over-year (+110bps above what even the government calls acceptable).
  2. Brazil is raising its inflation forecast for 2011 to +4.98% - that’s pretty precise because they change the estimate as prices change.
  3. Korea’s Posco (the 3rd largest steelmaker in the world) cuts earnings guidance by 7% due to “commodity costs” rising.

All the while, back here in the Empire of the Fiats, after the US Dollar has lost -13% of its value over the course of the last 19 weeks, Ben Bernanke is going to fear-monger you into trusting that everything you put in your car or grocery basket is deflating. Keep snorting on that QE idea dude. Arthur Burns did.


Ahead of Heli-Ben’s deflation speech at the Boston Fed on Friday, think about what’s really going on behind the scenes here folks. The US government is broke and can’t afford to tell Americans on Social Security that professional politicians would rather pay themselves than the political piper.


As my partner, Howard Penney wrote yesterday, health insurance premiums are rising, poverty is up (43 million on food stamps), and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.


As a point of reference, Social Security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.


The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on Social Security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.


Now you know why Bernanke’s speech in Boston is titled “Revisiting Monetary Policy In A LOW INFLATION Environment”…

Keep taking whatever train you boys at the Fed need to get on to help CNBC cheer that stock market higher. We know what’s going on behind the scenes.


My immediate term support and resistance lines for the SP500 are now 1153 and 1173, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Inflation Wars: Snorting QE - fisher

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The NFL Calendar is Re-Written

The old adage in NFL product licensing is that “Reebok owns Sunday (pro), Nike owns Saturday (college), and Under Armour owns Friday (high school).”  Well, get ready to rewrite the calendar. Reebok’s 10-year deal with the NFL expires in 2012, and the lion’s share is ending up in Nike’s hands. Nike is a winner here. But let’s face it…these deals are getting expensive. The biggest winners might very well be the retailers.


A few thoughts…


1)      Nike will absolutely blanket both the collegiate circuit as well as the NFL.


2)      A decade ago, this deal did not make sense for Nike (it was just emerging from a VERY ugly period when the contract -- which it owned -- came due). Today, it makes all the sense in the world. This synchs perfectly with the company’s focus to go deep into specific categories – US Football being one of them.


3)      It’s not on the cheap. We’re still waiting on numbers, but it’s safe to say that it will be well above the $30mm/year paid by Reebok. This deal will also have some up front payment that is likely to flow through the P&L. The interesting point here, however, is that even if it were $60 per year, we’re only talking 2% of Nike’s Demand Creation budget. If there was never a single dollar of sales associated with this deal, it would only hurt margins by 30bps.  Clearly, that’s not the plan…but it shows the size and scale Nike has vs. its’ competition.


4)      Let’s give credit where it’s due to AdiBok for not chasing this puppy. But what does it do now? The $300mm was an extremely poor investment for Reebok – one of the worst in recent memory for any company in this space. But Adidas now has a powerful $30mm/year weapon on its P&L. Will it use it in another sport in the US? Will it go after specific athletes? Our bet is that it will up the ante for European Football. Nike will not have the luxury of ignoring this.


5)      Under Armour is more likely to get Tom Brady (see our 10/7 post – Tom Brady – Free Agent). That would be somewhat of a loss for Nike – even though he has not had great commercial value. The traditional Nike mindset would be to keep him anyway (they'd let pride get in the way). If they let him go, it will impress me as it relates to Nike letting its ego go and focusing on the highest ROI uses of capital. That said, while cutting Brady loose might make sense on paper, what happens if UA steals market share because they use him more effectively? Decisions, decisions... I just argued both sides in a simple paragraph. Can you imagine what the debate is like internally?


6)      Foot Locker is likely to benefit as well. Note that Nike has co-branded NBA shops with FL. FL would love NFL shops, but AdiBok wasn’t exactly the best partner. That will change.

JCP: Orange Jumpsuit Risk?

Who knew what, when?


JCP: Orange Jumpsuit Risk? - JCP Call Option Activity 20101012

JCP: Orange Jump Suit Risk?

Who knew what, when?


JCP: Orange Jump Suit Risk? - JCP Call Option Activity 20101012

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