TGT: Aweful Quality Beat


We’ve been bears on TGT for most of this year under the premise that the financial engineering over the past two years left the company without the resources to achieve its aggressive top line growth goals while improving margin – and that’s regardless of any erosion in the Macro climate. You simply can’t stave off Ackmanism by way of cutting costs and expect that to be a good platform for growth. This quarter was another piece of evidence in that chain.  Operating EPS was weak by most measures, with the entire beat – and then some – coming from better results out of the credit portfolio. ‘And then some’ is probably an understatement. We’re talking $83mm year on year – that’s about $0.08 per share, or 8% yy EPS growth. We don’t want to take this away from TGT by any means, as this is a real earnings contributor. But in 1Q of next year, we have to ask ourselves if there’s any mathematical way to get another $83mm in upside in the credit portfolio without pinching retail? Again, one of our macro concerns in retail is that our bearish outlook in 2H proves false as the consumer takes down the current 5% personal savings rate in order to fuel its spending addiction. That’s worked in the past when interest rates were heading South. But if we’re sitting here later in the year with the personal savings rate and interest rates BOTH near zero, AND with TGT having made its quarters by way of lowering its bad debt expense, it simply does not give us that warm and fuzzy feeling in our gut.


TGT: Aweful Quality Beat                     - TGT S 5 18 11



Athletic Apparel Positive Diversion


Athletic apparel sales posted a sequential acceleration in the athletic specialty channel; a slight positive in advance of the FL quarter. Total industry sales ticked slightly lower, however, showing a continuation of the volatility that we started to see several weeks back. One factor that keeps us from ringing any alarm bells given volatility in other channels is the sheer strength in ASPs across the board. That continued in the recent week.  


Lastly, on a regional basis New England was a clear negative standout as the only region to report a sales decline last week down -12% reflecting a saturated weekend with the Mid-Atlantic and South Central outperforming up +16% and +14% respectively – not good for DKS despite commentary yesterday that they “have seen a return to expected sales performance” and better on the margin for HIBB.


Athletic Apparel Positive Diversion - App Table 5 18 11


Athletic Apparel Positive Diversion - FW App Reg 5 18 11


Casey Flavin



Due to the magnified impact on MPEL's bottom line of low hold given its junket mix, MPEL may disppoint whisper EBITDA expectations of $145 million. However, volumes were strong. Here is what they said last Q.




  • “We will have some incremental expense associated with new amenities such as Cubic...and the full impact of our labor rate increase, which took place in the middle of the fourth quarter. But net-net, we think we can keep a very tight lid on expenses and FTE increase in 2011.”
  • “We also opened two new junket rooms at City of Dreams.”
  • 1Q11 guidance:
    • “Depreciation and amortization costs is expected to be approximately US$85 million...
    • Corporate expense is expected to come in at US$17 million to US$18 million...
    • Net interest expense is expected to be approximately US$28 million...
    • We do not expect any meaningful pre-opening or capitalized interest in the first quarter of 2011.”
  • “Our first quarter results are off to a good start. We experienced a strong Chinese New Year holiday period, with visitation and gaming volumes well in excess of last year’s results.” 
  • “Our marketing grip has generated significant results through its destinational sales strategy, building relationships with travel trade operators throughout China, and the APAC region, as they continue their 20-city roadshow tour in the first half of 2011.”
  • “We believe the introduction of another integrated resort on Cotai will benefit City of Dreams.”
  • “We expect to continue to reduce our debt balance in 2011 through scheduled amortization payments and cash flow from operations.”
  •  “I think usually after Chinese New Year, which is 15 days after the first day of Chinese New Year, we tend to expect much slower volumes in Macau.”
  • “For the full year of calendar 2011, we’re expecting about US$60 million of total CapEx, the vast majority of that will be growth rather than maintenance.”
  • “In terms of the overall representation from the premium direct, the business represents about 15% to 20% during fourth quarter. And basically, Altira is a junket play.”
  • “I think in the last quarter (3Q), and currently, we stick with the commission cap low 1.25% to the junkets and also we count religiously a significant type idea whereby our revenue share more though in junket and COD stick with the same level of our neighbors. So we didn’t see any changes in terms of rebate to the market in the last couple of months.”
  • “We haven’t seen any need to change our overall provisioning policy and we’ll continue to follow our existing policy. At this point, we think we’re in good shape as far as our reserve and adequately reserved in light of our business volumes.”
  • “It is very clear that tourism promotion and also the fact that China is trying to move into a consumption spending economy is definitely the case, and therefore that benefits Macau and tourism sectors in general. So all in all, we are not concerned about these tightening measures. But with regard to the banking system, I think it provides a solid platform for the Chinese economy to continue to grow at a steady pace for years to come.”
  • [Altira growth] I think it is a combination of both visitation numbers as well as our growing number of membership, and the reason is quite mixed in terms of the growth story. But we did a lot of looking to the opportunity in a lot of direct marketing and also in different tier of the alignment with the customer with the different tiers of customer, including premium mass and mass. I would think that that our premium mass is doing a little bit better than the mass, purely because we put a lot of effort in looking to opportunity going forward to in terms of direct marketing.”
  • “That additional hotel tower together with the podium is a 1.5 million square feet development. So, when we do build it, it’s going to be a significant addition to City of Dreams, not just on the hotel inventory side, but also in addition on the overall proposition being subject to regular government’s approval on additional gaming space or retail restaurant proposition.”
  • “We still have a management contract for Macau Studio City, and we continue to have discussions with the partners of Macau Studio City to hopefully have that project start in one way or the other.”
  • [Cubic opening] “I think we are looking at a end of first quarter, early second quarter date."
  •  “Hard Rock Cafe is certainly a lease that we have with a licensee from Hard Rock International. They plan to start construction within the next month or so and are currently planning a September or Q4 opening for the cafe.”

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Notable news items and price action from the past 24 hours as well as our fundamental view on select names.

  • MCD’s $400 million 3.625% 10-year senior unsecured debt has been rated “A” by Fitch Ratings. 
  • CMG’s Jack Hartung and Steve Ells bought 5,000 and 10,000 shares, respectively, on 5/13.
  • PNRA’s “pay-what-you-want” restaurant in Clayton, Mo., is promoting the brand and, surprisingly, making a small profit, according to media reports.
  • CBOU and DPZ gained 2.1% and 1.2%, respectively, on accelerating volume yesterday.
  • CHUX gained 17% on accelerating volume following stronger-than-expected earnings.
  • KONA declined -1.8% on accelerating volume.





Howard Penney

Managing Director

Temporary Safety

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”

-Benjamin Franklin


In “The Road To Serfdom”, F.A. Hayek ends an excellent chapter titled “Security and Freedom” with that very American quote from Benjamin Franklin in 1755. Compare and contrast that thought with this quote from America’s central planning elite last night at the Harvard Club:


“Fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength… and the country’s ability to protect our national security interests.” –Tim Geithner


Notwithstanding that Geithner has been a Government Gopher since 1988 (when he joined the Treasury department), the man has since blossomed into a full-fledged storyteller of fear mongering.


Whether it’s been Geithner serving as:

  1. 1 - Squirrel hunter and yes-man in chief of the Robert Rubin/Larry Summers’ era of ‘we’re bigger than markets’
  2. 2003-2009 – President of the Big Broker Club at the Federal Reserve Bank of New York
  3. 2009-2011 – US Treasury Secretary who has overseen a US Dollar Index decline of -16% since he assumed office

It’s no secret that I disagree with Geithner on many scores, but I wholeheartedly agree with him on this - the political strategy of scaring the hell out of whoever he can. With his track record of contributing to this country’s fiscal problems, you should be afraid – very afraid.


How we got here and why it’s not going to change where we are going anytime soon has been compiled in my Early Looks since I decided to start writing about real-time risk management matters 3.5 years ago. Of all the fundamental conclusions I have had about Big Government Intervention, here are two that have achieved the deepest simplicity:

  1. It shortens economic cycles
  2. It amplifies market volatility

“It”, being Big Government Intervention… and the Government Gopher being the last man standing who is dumb enough to fundamentally believe that it’s the American public that’s too dumb to understand what’s going on here.


Now when you call someone “dumb”, the elitists who are concerned with titles and resumes dismiss you – but I care as much about their opinion as I do someone who says there should be no fighting in hockey.


Dumb is as dumb does – and if they want to suit someone up in a Ph.D. in Economics dress and send them on over to 111 Whitney Avenue in New Haven, CT to tell me that what Geithner has been doing since 1988 has been smart, I’ll be waiting for them.


“It” is the Big Government Intervention. “They” are the bureaucrats. We are The People.


Back to this Global Macro Grind


Stocks, Bonds, and Commodities all reminded us yesterday of one fundamental reality that virtually the entire sell-side has had wrong for the past 5 months – GROWTH IS SLOWING. So let’s go through that:


1.   Stocks – closing down for the 3rd consecutive day, the US stock market has been down for the last 3 weeks. The rest of the world’s stock markets, started going down a few weeks before that – immediately following The Bernank’s pandering to the central planning elite to remain what we have coined as being “Indefinitely Dovish” (Q2 Macro Theme).


2.   Bonds – US Treasury Bonds in particular have been ripping to the upside (see Chart of The Day) ever since The Bernank reminded the world that both his growth and inflation forecasts were wrong (again). Growth Slows As Inflation Accelerates. We remain long Long-term US Treasury bonds (TLT) as a way to play the “Indefinitely Dovish” Macro Theme. We’re also long a US Treasury Flattener (FLAT).


3.   Commodities – May has been a mess. And a mess is what you should expect the likes of the Gopher to do to The Correlation Risk that’s imputed in daily US Dollar moves. You cannot experiment with blasting your currency to all-time lows and not assume unintended consequences. Temporary Safety, Mr. Geithner, this is not.


The good news here is that The People get it. They get the principles of individual freedom and national security. They also get that this is the only time in this country’s 235 years of economic history that some central planner has been able to politic on the platform that the markets are “national security” issues.


Geithner has spent the last 23 years of his life working on this. He’s only 49 years old. Imagine spending 47% of your life contributing to the “foundations” of America’s fiscal problems. Trust him – he knows his stuff.


Institutional money managers don’t trust the US stock market rally as much as they did while the stock market was going up – shocker. This week’s Bull/Bear Sentiment reading (Institutional Intelligence survey) saw the spread between Bulls and Bears narrow – big time.

  1. Bulls dropped from 51% last week to 45.6% this week
  2. Bears inched up to +18.5% last week to 19.6% this week
  3. Spread (Bulls minus Bears) narrowed from 32.5 points last week to 26 points this week 

I certainly make my fair share of mistakes, but I generally don’t pose a “national security” issue to our country and I certainly don’t make a habit of chasing markets at YTD highs. That’s where we were 3 weeks ago when the Bull/Bear Spread was +38.5 points wide and I shorted US stocks.


Please don’t let America’s central planning storytellers promise you Temporary Safety in exchange for their long-term job security.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are $1, $94.91-99.67, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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