MGM Mirage Shareholder Mtg, May 13, 2008 (and "Star Trek: The Experience" Review)

I recently went to Las Vegas to attend the MGM Mirage annual meeting, which took place at the Luxor. The food spread was fabulous, as you might expect. There were several different kinds of jam, honey, pastries, and fruit juice, in addition to the usual coffee. Kirk Kerkorian was in the audience, and it was fun seeing his cameo appearance on the two large screens used to broadcast the speakers at the podium. The background on the stage used changing colors to highlight the theme this year, "Vision." (The full theme was listed in the annual report: "Vision with action can change the world." -- Futurist Joel Barker)

MGM opened by presenting how well they had done last year in terms of revenue. Of course, the stock was down about 40% this year, so the presentation, while entirely accurate in terms of breaking new records, seemed more historical than future-seeking. The CEO, J. Terrence Lanni, then made his own presentation and answered questions. He emphasized the new City Center project, which looks like a model city, combining retail, housing, and a resort, all in one location on the Strip (http://www.citycenter.com). MGM apparently owns more real estate on the Strip than any other casino operator, and is making good use of it. When asked a question about congestion, CEO Lanni said that he agreed that the project was contributing to the "Manhattanization" of Vegas, but there was no other option because of the limited land available for development near the Strip. He also said that residents should be thankful, because it was projects like these that allowed them not to pay any state income tax.

The presentation also mentioned the DubaiWorld alliance, where DubaiWorld, now a 9% owner, could eventually become a 20% owner. The CEO welcomed the investment and said he looked forward to expanding in Dubai and Abu Dhabi, saying that both countries had substantial experience in attracting tourism and building exquisite resorts. I had welcomed the international diversification of MGM's portfolio, but I had not considered the additional advantage of partnering with Dubai, which does have excellent experience in building luxury properties.

Some mention of an alliance with an Indian reservation in Detroit was mentioned, where MGM would lend its name and expertise to the resort in exchange for revenue-sharing. Another casino was also scheduled to open in Atlantic City, increasing MGM's geographic reach.

The alliance with the Detroit casino was part of an interesting revenue model called "capital-lite." Basically, MGM is willing to license its name to other casinos to give them credibility in exchange for revenue. It appears that such a business model will generate significant cash while involving minimal investment; however, in the long term, if these casinos do not do well or reduce quality, MGM's image may suffer.

The first "question" was from a government official from Detroit, thanking MGM for coming into their city and saying that they had a history of making the cities they entered better (a not-so-subtle request for more charitable donations for Detroit to ensure MGM's status as a cooperative, good neighbor). Some other questions dealt with personal issues, such as someone who was injured over a decade ago at the Excalibur property. The CEO said he couldn't take credit or detriment for whatever happened, because the event occurred before MGM bought out the property, but he was sorry for what happened. It was a very deft answer. Another person bemoaned the high prices for certain services, such as internet access at hotels. The CEO answered this question deftly also, asking whether the speaker had escalated his concerns to a manager at the time (the speaker said he had not). Someone else, apparently not happy with the complaints, got up and said that he had invested in MGM many years ago with Kirk Kerkorian's group, and apparently bought MGM bonds in the 80's and had done very well and encouraged people to stay in the stock for the long term.

That was sort of the theme of the day--that although the economy wasn't doing well, and the situation would be challenging, in the long run, MGM was positioned well, and much better positioned than its main competitors, the Las Vegas Sands (LVS) and the Wynn. Those two stocks were down more than MGM's stock year to date, and apparently, the newest LVS project, the Palazzo, wasn't doing as well as expected. There was some mention of how the federal government and California were taking away certain funds, thereby increasing the cost of building a highway directly from Southern California (Orange County?) to Las Vegas. The CEO mentioned the possible 20 billion dollar deficit was causing the California Governor to dip into other funds to balance the budget, thereby impacting transportation projects.

I asked two questions. One, which casinos brought in the most revenue and profit, and which brought in the least? The CEO mentioned that in terms of both revenue and profit, the top casinos were Bellagio, Mandalay Bay, and Mirage. I wasn't expecting the usual players to be on both lists, and I was hoping that some international resort, like the MGM Macau, would also be among the top producers, but it does make sense that the more established casinos would be the major revenue and profit generators. The CEO facetiously asked if he got a prize for answering correctly, but forgot to answer the question about which were the worst revenue and profit generators.

I also asked the last question, which basically went like this: "I feel there's a missing gap here today. You keep mentioning that there's going to be a recession, but you're spending money and you're not cutting back on expansion. In a recession, you make money by either cutting expenses or increasing prices, and you haven't said anything concrete that makes it sound like you're going to do either one. Some of the people who asked questions here today sounded like nudniks, but perhaps the one gentleman had a point about certain prices, especially internet use prices, being too high. Maybe MGM should reduce certain prices to attract more casual and mid-week visitors. As it stands, you're basically telegraphing that you're going to lose money because you're expanding and spending money while entering a recession."

The CEO responded by saying that the board had gone though several recessions [a dig at my younger age] and had done well eventually after each one. He said that lowering prices wouldn't work, because it would be like the failed strategy that gas stations took in the old days, when one station would lower prices by a penny, causing the competitor across the street to lower his prices, leading everyone to lose money. [This sounded like an anti-trust issue, and it concerns me generally when CEOs say they won't cut prices in any circumstance as a matter of policy.] He ended on a high note saying that MGM had made money in all kinds of economic environments, that its stock price would increase in the long term, that its stock price was too low right now, and he hoped that the investors would stick with MGM, and MGM would stick with its investors. His response received enthusiastic clapping from the audience, and the meeting was done.

I prefer CEOs that are humble (see John Deere's CEO, Robert Lane) and not so much "showman-y," but I am sure Mr. Lanni's colleagues consider him to be charismatic. In addition, Lanni was a former CFO, so he obviously has substance. Overall, I believe MGM will not be able to replicate its record in 2007 and will make less money in the short term, but I will watch its stock price carefully, and if it continues to plummet, at some point, it should make a good value buy.

For those of you who are interested in my Las Vegas accommodations, I stayed at the Las Vegas Hilton, which is different than the Hilton Grand Vacations Club (though both are near each other). The Hilton Vacations Club is on the Strip, though far from the main drag, and is the more traditional Hilton hotel. The LV Hilton is located behind the Rivieria Hotel and takes some physical effort to get there. When deciding where to stay, you should probably use the Hilton website (www.hilton.com) rather than the LV Hilton website (http://www.lvhilton.com). While you can still get Hilton points from either hotel, the LV Hilton is owned in part by a different company.

The LV Hilton hosts "Star Trek: The Experience." If you are staying at the hotel, you get a discount on an all-day pass (at least when I was there). The "Experience" consists of three parts--first is the open restaurant, Quark's Bar and Restaurant; second is the Borg Invasion; and third is the Klingon Encounter.

Quark's Restaurant looks just like the Deep Space Nine restaurant. If you are lucky, you will see an actual Ferengi come by and chat you up, and you can buy the rules of the Ferengi next door at the Star Trek store. When I went to a female Vulcan to ask a question about opening and closing times, she greeted me by saying, "Yes, human?" I started cracking up, but she kept a straight face. All the actors in the events are well-trained. That professionalism alone did it for me, and made me a fan of the "Experience."

The Borg Invasion is basically an invite into a genetic study that goes awry when the ship is attacked by the Borg. Several Borg entities, including the Queen, make an appearance, but I won't spoil it for anyone by saying more. This event is like Michael Jackson's "Captain EO" and Great America's "Days of Thunder," where the show revolves around 3-D effects (in the Borg event, it's actually "4D") and you, as the audience, get to participate in what is occurring.

I preferred the Klingon Encounter, because it is more action-oriented. It involves a roller-coaster type ride and really makes you feel like you are under attack. I enjoyed hearing Captain Picard's voice and actually seeing the interior of the Enterprise. If you can't go to both events, go to the Klingon Encounter, unless you are a bigger fan of Deep Space Nine and the doctor on that show.

There is also a "Behind the Scenes" tour, which I was unable to attend. Two people in line ahead of me went and raved about it. They also received a certificate of attendance, which was high-quality and something a fan would probably frame. Overall, I had a good time in Las Vegas and would recommend a trip there to anyone who is willing and able to walk long distances--the way the Vegas Strip is set up, you have to walk quite a bit to get from attraction to attraction.

© Matthew Rafat (2007)

Wesco Shareholder Meeting, May 7, 2008

Charlie Munger and myself
Charlie Munger and myself
President Jimmy Carter
If you're a Berkshire Hathaway shareholder, you know about Charlie Munger, the quick-witted lawyer who sits next to Warren Buffett and usually makes a brief comment that encapsulates in five seconds what Warren just took about three minutes explaining. Mr. Munger has his own company, Wesco (WSC), a subsidiary of Berkshire. To attend the meeting, which takes place after the Berkshire Hathaway meeting in Omaha, you can buy individual shares of WSC, or your ownership of Berkshire Hathaway automatically entitles you to admission. After going to the Berkshire meeting in Omaha, many fans, especially money managers, come to Pasadena, CA to hear Charlie speak. I saw so many money managers and dapper suits, I felt out of place with my jeans and more casual wear. The entire meeting, before it starts, really seems like one big networking event.

This year, the event took place at a special tent set up in the Pasadena Convention Center, about 25 minutes from Burbank Airport, the closest airport to Pasadena. Pasadena is a clean, diverse city that hosts the famous Rose Bowl and Rose Parade. I enjoyed walking around the older downtown area, i.e. the Old Pasadena section, which has several independent stores and old churches. While there, I discovered that President Jimmy Carter would be appearing at Vroman's bookstore to sign his new book about his mother. My friend bought a book, which came with two entrance tickets to see President Carter.

The meeting itself lasted about three and a half hours. Refreshments were basic--just coffee, some lemon bars, and some unsavory cookies. Mr. Munger had some interesting quotes, as always, in his version of "Socratic solitaire":

My favorite: "There will be a lot of chicanery in the new world."

We should expect returns of around 4 to 5% annually in the near future.

When talking about the overbuying of homes, which led to the bubble in housing prices, and the subprime mess, Mr. Munger talked about how investment "activities rely on momentum from self-fulfilling prophecies" and blamed greed, envy, and terrible accounting. Munger's fans were delighted when they heard, "Include me out," a favorite Mungerism.

Mr. Munger told a delightful story about keeping the big picture in mind and being willing to buck conventional thought. He talked about a boy in mathematics class who had to answer the question, "How many sheep are left in the pen when the gate is open and one leaves out of the ten?" The entire class told the teacher, "nine." One student, Billy, said, "ten." "Poor Billy," said the teacher, "you just don't understand math, do you?" Billy said, "No teacher, you don't understand sheep." That story got some uproarious laughs from the crowd.

"In accounting, liabilities are 100% good. It's the assets you have to worry about."

"Greenspan overdosed on Ayn Rand."

Those were some of the highlights of the day. Overall, it was fun listening to Munger speak, and I bought his book, Poor Charlies Almanack. Mr. Munger signed it and took a picture with me.

Afterwards, my friend and I went to see President Carter at Vroman's. Secret Service ushered everyone along very quickly, and people who wanted to take pictures could only do so for a few seconds before being told to move on. President Carter looked healthy and vibrant, and it was fun being in the presence of a former U.S. President, even if only very briefly. One tip: you cannot put your hand in your pocket anywhere near the President. I put my hand in my pocket to take out my camera, and was approached by two Secret Service agents almost immediately, who backed off only when they saw the camera.

I was exhausted when I returned to the airport the same day to head back to San Jose, but all in all, it was a pleasant experience, and one I would do again.

Was Plato a Libertarian?

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws." -- Plato (427 - 347 B.C.)

In an unrelated note, the DJIA closed at almost 13,000 today. I already sold most of my individual stock holdings last month, but today I sold most of my mutual funds also. I now hold 30% of my retirement portfolio in various ETFs, international bond funds, and preferred shares, and 70% in money market funds. With my non-retirement funds, I have about 90% of my monies in money market funds. I just don't see a good investing horizon with 125 dollar a barrel oil (predicted to go to 200 dollars by Goldman Sachs); a stronger dollar, which will reduce earnings of multinationals, who haven't adjusted earnings guidance downward yet; a possible recession; no Medicare solution in sight; a 12 to 20 billion dollar deficit projected in California, one of the world's largest economies; a possible Democratic Congress and Democratic presidency, which I may support, but which will lead to a higher capital gains tax; and the tapering off of the effects of the Fed's actions.

Given these facts, only those with opaque rose-tinted glasses would be optimistic about the stock market over the next year and a half. But I hope I am wrong.

Cypress Semiconductor Annual Shareholder Meeting (2008)

Cypress Semiconductor (CY) runs its meeting professionally. Doors are closed after the meeting time, although a security guard allowed me to enter. Two employees check your proxy card, along with your ID, and write out a name tag before letting you in. CY gave away a nice bag this year to all attending shareholders. Also, the food spread was more than your typical coffee and cut fruit--it was a smallish buffet, with some shish kabob and several selections of cheese and whole fruits. In the back of the room, there are several displays about how CY's technology is used in applications as diverse as timers and solar panels.

CY has one billion dollars in cash-that's the first thing I noticed from its presentation. CY is headed by an engineer (T.J. Rodgers), and he gave us a lecture on how CY's technology is more efficient and creative than its competitors. For example, his PSoC, or Programmable System on a Chip, allows companies to move components on a reference design board to get the result they want. In addition, the PCBs do not require the use of a Cypress proprietary IC chip, allowing more flexibility. By being more flexible about the chips necessary for its software and design boards, CY may be able to charge for its boards and software at some point in the future. In contrast, its competitors typically give away their boards and software because they are only functional with the companies' own IC chip, where the company plans on making sales and profits. CY, however, works with several different companies, including NOK and MOT, which use Cypress chips in some of their phones. With respect to "sideloading," which includes the task of uploading movies or content onto a phone using a USB device, I thought it was interesting that the RIMM and MOT phones were currently among the fastest, while the Sony ERIC phone was the slowest. Apple's iPhone speed was in between.

CY's PSoC design may also be more environmentally friendly, because fewer boards and components are necessary to accomplish several different tasks. The presentation included showing us how one such board could create several different kinds of light in different intensities, all from one board. (We were treated to a fun, small-scale Disney Fantasia show, where the CEO, who was holding a rectangular 8 watts LED light, would tell an associate across the room, "Blue! Now turn it up [in intensity]. Now green. Now white." You get the picture.)

This is where it gets interesting. CY's technology encourages the use of LED lights, which last longer and use less power, and are therefore more environmentally friendly. There are three types of lights: LED, CFL (compact fluorescent), and INCAND (incandescent), in order of most environmentally friendly to least. The LED light required the most upfront investment--around 12 to 20 dollars--but over its life of multiple years, sometimes even as long as 17 years, the buyer would spend less because electricity bills would be lower. Therefore, while the INCAND bulb only cost around 4 dollars initially, it actually cost 300 dollars more than the LED light over the same period of time because of the extra "juice" it requires. The CFL was in between, but the LED light was clearly superior when lifetime costs, not just initial costs, were factored in. The lesson I took was to try to find LED lights whenever possible, despite the higher upfront cost.

However, despite this new angle and method of designing semiconductors, the charts showed that semiconductor sales were decreasing and have been declining for quite some time. Most of CY's growth comes from its earlier acquisition of Sunpower, a solar panel technology company. [Update: CY has spun off Sunpower.] CY focused on the fact that its solar panels are far more efficient than its competitors, especially those using "thin film" or "conventional" solar panels. CY also mentioned that it was going to present the tax consequences of spinning off its Sunpower company to shareholders to the Board that same day.

I was very impressed with the presentation and this company. Few companies present themselves so professionally and are on the cutting edge of innovation.

Top 4 Traits for Success

The author of http://www.businesspundit.com/ posted this shorthand list of traits designed for success:

1) the ability to postpone short-term gain for a greater long-term reward;
2) optimism;
3) ability to deal with stress; and
4) initiative.

The discussion referenced whether IQ was genetic or learned, and the author's point was that even large differences in IQ did not matter in the modern world as much as the four traits above. I have always said that delayed self-gratification is extremely important to success, but with so many higher paying careers involving an understanding of mathematics, an ability or willingness to understand mathematics will also be important. As technology slowly eliminates the need for various service careers, those sectors will have to unionize or determine how to move the workers who are displaced into more productive positions. Yet, no IQ test can pinpoint desire (#4 above), which can overcome many inherent flaws.

Angry Bear

Mr. Houghton has published a fascinating piece on the cost of living in different cities:

http://angrybear.blogspot.com/2008/05/spacial-price-index.html

(This article references http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf)

Who wrote this? You'll be surprised...

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit...But the fact is that there are now more claims outstanding than real assets...In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value...Deficit spending is simply a scheme for the confiscation of wealth."

It's not Ron Paul. But it is another well-known libertarian, speaking in 1966.

Speaking of changing values, "Seanbaby," a local columnist for a free San Jose local magazine, writes a humorous column. This is from his most recent column: "What our parents wouldn't dream of doing until they were married and strapped into safety equipment is how children say hi to each other today. Hell, I couldn't believe what 15-year-olds did when I was 16. We're less than a generation away from Baby Gap selling thong panties." (The Wave, Vol. 8, Issue 10) Absolutely hilarious.