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EGREGIOUS EXPLOITATION OF EASY MONEY

One would be hard pressed to find a sector that benefited more from the easy money era than gaming. Unfortunately, for investors in many of these stocks we’ve come to the end of an error. Throughout most of the decade, gamers exploited the low interest rate environment to over invest and over leverage. Wall Street loved it. Long term IRR and ROI? Who cares? Growth and EPS accretion, where do I send the check? Gaming stocks outperformed the S&P by a wide margin over the past decade. As the chart shows, the level of outperformance correlated very closely to the inverse of the US corporate bond yield. In fact, the level of interest rates explained 62% (R Square=0.62) of the spread between gaming stocks and the S&P.

It should come as no surprise that gaming stocks have been pummeled by the recent credit crisis. Gaming management teams left their companies with super high leverage and significant debt maturities in an environment where cash flows are declining. As these companies refinance over the next year or two, it will become crystal clear how much they’ve over earned the past few years.

Of course, there are exceptions. There are companies on the right side of this liquidity trade. BYD, PENN, and WYNN all maintain low relative leverage and tremendous liquidity. The rest of the gamers have had religion crammed down their throats by the credit markets. BYD recently found religion on its own and suspended Echelon. WYNN and PENN never lost it.


Gaming stocks outperformed the S&P during the easy money era

Japanese Stagflation Remains Reality...

Japan reported another 10 year high in their consumer price inflation number this morning. At +2.4% y/y, the August report remains as elevated as it was in July (see chart).

You do not want to be long an economy with a socialist government bailout policy. You do not want to be long an economy experiencing stagflation. Sound familiar?

We remain short Japan and the US via etf's (EWJ and IWM).
KM

Please Ignore The 2:19pm FL Post

In my infinite wisdom, I entered FL instead of FINL in the headline. All other info is the same.

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FINL: 3.5 WEEKS NOT ENOUGH TO KILL A YEAR

Ok, I get it. Comps decelerated for the first 3.5 weeks of September. But a double digit hit to the stock? Clearly Mr. Mo had high expectations into this one. While he heads for the exit, I’m staying put fundamentally. Management’s cautious tone on the past few weeks will keep estimates low, and as noted this morning I think that FINL’s business and margins are on the upswing. I think FINL has 2 points of margin over a year, which is tough for me to find anywhere.

A couple of points to consider about the company’s tone…
  • The way I am doing the math, if I assume the first 3.5 week’s erosion carries through the quarter, and then assume very little change in the multi-year run rate, I still get to a positive comp number by 4Q and EPS better than consensus. Beyond the overly simplistic ‘extend the trend’ mindset, I’m still firm in my view that we’ll see competition heat up between the major brands over the next 12 months, which will incrementally help FINL. I’m at a 5% comp by 4Q and earnings a dime (15%) better than consensus for the year. I’ll take that at 4.1x EBITDA.
  • The trajectory of comp guidance is also noteworthy. The company had a massive miss one year ago. The tone suggested +lsd comps, and they ended coming in -4.7%. Not good. Then FINL’s business and tone about the upcoming quarter were cautious in January and April, and FINL came spot-on with plan. But then in 1Q09, FINL faced another significant deceleration after the first 3 weeks. Still reeling from wounds from a year ago (and from the past three years of pain), FINL does itself no justice in setting a high bar going into the back half.

FL: 3.5 Weeks Not Enough To Kill A Year

Mr. Mo did not like the comp deceleration in the first 3.5 weeks of Sept. But I think FINL has 2 points of margin over a year, which is tough for me to find anywhere at 4.1x EBITDA.

Ok, I get it. Comps decelerated for the first 3.5 weeks of September. But a double digit hit to the stock? Clearly Mr. Mo had high expectations into this one. While he heads for the exit, I’m staying put fundamentally. Management’s cautious tone on the past few weeks will keep estimates low, and as noted this morning I think that FINL’s business and margins are on the upswing. I think FINL has 2 points of margin over a year, which is tough for me to find anywhere.

A couple of points to consider about the company’s tone…
  • 1) The way I am doing the math, if I assume the first 3.5 week’s erosion carries through the quarter, and then assume very little change in the multi-year run rate, I still get to a positive comp number by 4Q and EPS better than consensus. Beyond the overly simplistic ‘extend the trend’ mindset, I’m still firm in my view that we’ll see competition heat up between the major brands over the next 12 months, which will incrementally help FINL. I’m at a 5% comp by 4Q and earnings a dime (15%) better than consensus for the year. I’ll take that at 4.1x EBITDA.
  • 2) The trajectory of comp guidance is also noteworthy. The company had a massive miss one year ago. The tone suggested +lsd comps, and they ended coming in -4.7%. Not good. Then FINL’s business and tone about the upcoming quarter were cautious in January and April, and FINL came spot-on with plan. But then in 1Q09, FINL faced another significant deceleration after the first 3 weeks. Still reeling from wounds from a year ago (and from the past three years of pain), FINL does itself no justice in setting a high bar going into the back half.

Is the top for the Chinese Yuan in?

This didn't get much air time on consensus TV this morning, but that doesn’t mean that it doesn’t matter. The Chinese Yuan had its biggest down day since 2005.

Within the picture of the long term Yuan chart, Andrew Barber has highlighted the short term down move. The intermediate term "Trend" in the Yuan's strength is finally starting to deteriorate, and this is one of those big Queen Mary charts that the world will need to pay attention to if it were to turn.

The Chinese government cut interest rates for the 1st time this month, and as economic growth continues to slow, we do not think that the 1st cut was the last. Cutting rates should beget further weakness in the Yuan.

That would be deflationary for the world altogether. This is a movie that economic historians have seen before. It is global this time, indeed.
KM

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