prev

THE M3: GOVT RETAINS CONTROL OF OUTER HARBOUR FERRY TERMINAL; NEW CRA CHIEF

The Macau Metro Monitor, June 3, 2011

 

 

GOVT TO MANAGE OUTER HARBOUR FERRY TERMINAL macaubusiness.com, Macau News

The Director of the Maritime Administration, Susana Wong Soi Man, said the Macau govt will not renew the concession contract with Sociedade de Turismo e Diversões de Macau (STDM) regarding the control of the Outer Harbour Ferry Terminal after the contract expires on December 20.  Meanwhile, she also said that the fare increase applications submitted by four ferry operators--Far East Hydrofoil Company Limited, Hong Kong Macao Hydrofoil Company Limited, New World First Ferry Services Limited and Shun Tak-China Travel Ship Management Limited will be authorized but some may not be at the rates requested.

 

CASINO REGULATORY AUTHORITY GETS NEW CHIEF, LAU PEET MENG Channel News Asia

Starting June 15, Singapore's Casino Regulatory Authority (CRA) will have a new chief executive, Mr. Lau Peet Meng, who is the senior director of the Policy & Operations Division in the Ministry of Home Affairs and Assistant Commissioner of Police.

The current CEO of the CRA, Mr. T Raja Kumar, will return to the Singapore Police Force where he will be appointed Deputy Commissioner of Police (Policy).


SP500 Levels Refreshed: Dazed and Confused

Yesterday with Keith on the road, I wrote our intraday market note and highlighted that the stock market was broken on the intermediate duration based on our quantitative models.  As always, closing prices dominate and the SP500 closed below yesterday’s trend line of support, which was at 1,324.  Thus, until further notice, the SP500 is broken based on our quantitative models.

 

Today’s action is indicative of a dazed market that is having a difficult time finding real buyers, despite how “cheap” it is.  Interestingly, the market is flat despite a substantial sell off in the USD.  Currently, the EUR is up 1.17% versus the USD, while the U.S. dollar index is down over 0.60%.  The fact that U.S. equity markets are flat to down, despite this sizeable selloff in the USD market today, is a noteworthy observation, even if just for one day.

 

Over the past couple of years if there has been one tried and true correlation, it has been dollar down and most everything, particularly equities and commodities, up, with the 1-year r-squared between the SP500 and U.S. dollar index at 0.71.  We’ll have to wait and watch to determine whether this correlation is changing, but it is certainly confusing price action for those market operators that had been playing this correlation.

 

Undoubtedly part of the confusion in the markets today is born from Moody’s “update” on U.S. debt and deficit negotiation in which they stated:

 

“If the debt limit is raised and default avoided, the Aaa rating will be maintained.”

 

So, to paraphrase Moody’s, if the U.S. is allowed to issue more debt, that is deemed a positive and the Aaa credit rating will be maintained.  It’s shocking that the rating agencies have lost their credibility . . .

 

Below we’ve refreshed our current levels for the SP500. TRADE support is at 1,302 and TAIL support remains down at 1,214.  If the TRADE line holds, then maybe, just maybe, Morgan Stanley will get that Groupon IPO they just filed out the door, though we have our doubts if this market remains broken, as it is.

 

Daryl G. Jones

Managing Director

 

SP500 Levels Refreshed: Dazed and Confused - 1


ISLE F4Q11 CONF CALL NOTES

ISLE beats handily and numbers need to go higher.

 


"While we are seeing signs that the economic conditions for our business are slowly beginning to improve, we are cautiously optimistic that the positive changes we have made during the past two years will soon begin to have a more dramatic impact on our bottom line."

- Virginia McDowell, the Company's president and chief executive officer

 

 

HIGHLIGHTS FROM THE RELEASE

  • "Across our portfolio, we have been introducing new entertainment options through our Jester's Jam concert series, new dining options with the popular Otis & Henry's concept, and we have also streamlined our marketing to benefit from the synergy created by more centralized promotional and branding programs. As a result of these targeted investments, we have been able to maintain a reasonable mix of rated and retail business, even through tough economic times, and believe that this is an area of further opportunity for fiscal 2012. Further, we have recently put in place new marketing programs in Colorado and management in Vicksburg that we believe will positively impact our results in periods to come."
  • "Flooding along the Mississippi River resulted in the closures of five properties including: Davenport, Iowa; Caruthersville, Missouri; and Lula, Vicksburg and Natchez in Mississippi. At this point, three properties have reopened with Lula and Natchez remaining closed. We hope to reopen Lula this weekend, pending regulatory approval; however Natchez will remain closed until the Mississippi River recedes further."
  • Development updates: 
    • Cape Girardeau, Missouri: 
      • $125MM budget
      • broke ground on March 31, 2011
      • in final phase of contractor selection
      • planned to open late in 2012
      • 1,000 slots/ 28 tables
    • Nemacolin Woodlands Resort, Pennsylvania:
      • Through a development agreement with the Resort, ISLE will develop & manage Lady Luck Nemacolin
      • 600 slots/ 28 tables
      • Assuming no appeals filed by 6/19, construction should commence late summer 11' and the casino will open 9 months later (May 2012 or F1Q13)
  • As of 4/24/11, ISLE had non-restricted cash of $75MM and $1.2BN of total debt w/ $175MM of R/C availability
  • "Fiscal Year 2011 capital expenditures were $58.6 million, of which $13.0 million related to Cape Girardeau, $0.3 million related to Nemacolin and $45.3 million related to maintenance capital expenditures, including conversion of approximately 2,600 slot machines to the Bally's slot system technology."
  • FY12 guidance for non-operating items:
    •  D&A: $89-91MM
    • Cash income taxes: less than $5MM (primarily state income taxes)
    • Interest expense, net of capitalized interest: $83-86MM
    • Corporate and development expenses: $43MM, including $6MM of non cash stock comp
    • Maintenance capex: $50MM
    • Project capex: $90-100MM

CONF CALL

  • They continue to see signs of a recovery in half of the properties in their portfolio.
  • Hope to have a new COO within a month
  • Interest in the Q included a $2.2MM write-off related to their former credit facility
  • $33MM drawn on R/C; $500MM on new T/L, $357MM sub notes, $4MM of other debt
  • Flooding & claims: Deductibles are around $250k/location. They expect the first report filed for Davenport in the next few weeks. Timing of settling the claims depends on when the properties reopen and what happens elsewhere like Tunica.

Q&A

  • If anything happens in Florida, then they expect to get parity treatment
  • Volumes in Vicksburg were healthy when they reopened
  • Mechanics of recognizing insurance proceeds.  Business interruption comes through as revenues. It's still to be determined whether they will have any write-offs from property damage.   You get reimbursed for certain costs as well like payroll.
  • Customer behavior in impacted regions - In Vicksburg, the results have been in-line with prior expectations.  Caruthersville is also in-line with prior expectations.  Not that many people live in the flood plains at their properties. Don't think that there will be much of an adverse impact on their customers.
  • Why was corporate expense so low and why is the guidance for next year so high?
    • They spent a lot of money earlier this year to get licensed in PA & MO
    • Claim that the corporate number for the year was $42MM
  • They plan to have a GMP order on the Cape Girardeau project - generally speaking around $50-65MM is covered by that 
  • If there are appeals filed by June 19th at Nemacolin, it's unclear how long the delay would be, but don't think it will be that long.  They don't think that they will get appeals. They pay $150,000 per year in base fees to the resort and a % of revenues over $30MM. They expect that the fee that they will pay will be about $400,000 per year.
  • Even with the flood impact, they expect to be in compliance with their covenants
  • Capex spend throughout the year? Assuming everything is on time
    • 10% in 1Q; 15% in 2Q and balance is in the back half - either equal or 4Q loaded
  • Blackhawk numbers in the 4Q are actually masking a very positive trend.  The last quarter's numbers include some impact from renovations and management/ marketing/ dining/ hotel yield changes.  The trends are positive there, though.
  • KC market - competition in advance of Kansas speedway?
    • They are happy with their performance there; they have been gaining market share. They are not going to market into the Kansas Speedway opening.
  • Thoughts on IL proposal?
    • Still unclear on how the governor will respond.  Veto is still a possibility.
    • It will likely come down to a negotiation between the governor and the mayor

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

JCP: Covering TRADE

 

Booking a nice gain on the short side of JCP on the sales miss. Brian McGough remains bearish on JCP for the intermediate-term TREND. -KM

 

 

JCP came in well below expectations this morning citing weather for the second consecutive week as well as a shift of promotional mailers into April - a factor the company failed to mentioned as a positive driver last month. After a handful of brand highlights in April, Sephora was the only callout in May with Liz Claiborne noticeably absent. Additionally, internet sales remain underwhelming contributing only +2.8%. However, the most notable callout (and red flag) is the absence of any comment on inventories. Last month the company dropped the verbiage that inventories were “in-line with sales trends,” this month they failed to mention inventory altogether.

 

With the least attractive sales/inventory spread among its peers (KSS, M, JWN – see chart below), it looks like JCP is likely to maintain its laggard status over the near-term. We remain bearish on the deparment stores and are still convinced that JC Penney is in the center of the bulls-eye as it relates to the erosion in retail margins in 2H.

 

JCP: Covering TRADE - JCP 6 2 11

 

JCP: Covering TRADE - SSS Dept SIGMA 6 2 11


Liberalizing in Latin America

Conclusion: We continue to believe that the short-term scare ahead of a close Fujimori victory or the long-term capital flight that is likely to follow a Humala victory in Peru’s upcoming presidential election will serve as a warning notice for bureaucrats throughout the region to steer clear of further Big Government Intervention and instead opt to increasingly lean on the private sector as vehicles for economic growth.

 

As Peru’s financial markets brace for Sunday’s presidential elections, we wanted to use this as an opportunity to restate our long-term thesis on the implications of this historic election – which is that we’re likely to see increased economic liberalization throughout the region. As we wrote in an April note titled: “Peruvian Crystal Ball”, we think the potential for measured international capital flight from Peru will serve as a wakeup call against incremental socialism to the region’s leaders:

 

Such incremental sell-offs have the potential to destabilize the Peruvian economy and should be viewed as a warning sign to politicians throughout the region. Gone are the days of simply parlaying the poor vote into election victories – particularly at the highest office. As we are seeing currently, Latin American politicians must pay increasing attention to the desires of international investors, as well as the needs of the region’s growing middle class.

 

As resource-rich Latin American countries continue to capitalize economically from elevated commodity prices, we expect this trend to continue. This should put incremental pressure on regional leaders like Dilma Rousseff of Brazil and Cristina Fernandez de Kirchner of Argentina to open up to investor calls for additional privatization of the region’s vast investment opportunities in the coming years.

-Peruvian Crystal Ball, April 19, 2011

 

At a bare minimum, the surge in volatility we’ve seen across Peru’s equity, currency, and bond market has been noteworthy to say the least. In the YTD alone, Peru’s Lima General Equity Index has seen a -25.3% decline and a subsequent +27.3% melt-up; its currency, the Peru Nuevo Sol, has seen a -2.3% decline and a subsequent 3% gain; and its sovereign 5Y CDS has seen a +71bps melt-up followed by a -50bps decline.

 

Liberalizing in Latin America - 1

 

All of the volatility has been centered on the projected outcome of Sunday’s Presidential elections, in which the socialist Ollanta Humala goes head-to-head vs. the younger, more right-leaning Keiko Fujimori. We’ve written extensively about the credentials and policies of each candidate in previous reports, so we’ll spare you the details here. For more background, refer to the aforementioned “Peruvian Crystal Ball” and our April 27 report titled: “Everyone’s A Winner – Except Peru”.

 

As of yesterday’s close, various sources had shown that Fujimori’s lead in the polls was slipping: -100bps in the latest Datum poll and -270bps in the latest CPI poll (both released on May 29), while the larger Ipsos Apoyo poll showed both candidates in a statistical tie. The Lima General Index is up nearly +6% today on rumblings that Fujimori has gained +100bps in a private Ipsos poll (official polling is prohibited in the week prior to the election), which would give her the lead heading into this weekend’s election. An official Fujimori victory will likely be a further tailwind for Peruvian assets.

 

Shifting gears to the region at large, we continue to believe that the short-term scare ahead of a close Fujimori victory or the long-term capital flight that is likely to follow a Humala victory will serve as a warning notice for bureaucrats throughout the region to steer clear of further Big Government Intervention and instead opt to increasingly lean on the private sector as vehicles for economic growth.

 

We’ve already seen signs of this with Brazil selling controlling stakes at a few of its major airports in an effort to spur much needed infrastructure investment ahead of the 2014 World Cup and 2016 Olympic Games. This is following the announcements of a potential pullback in Petrobras’ “aggressive” capex plans and a possible fuel & energy tax cut. On the flip side, the ouster of former Vale CEO Roger Agnelli is a red flag that reeks of the government’s old ways of trying to promote domestic job creation through its state-owned enterprises. He was replaced with essentially a puppet of the Rousseff regime, Murilo Ferreira, who regularly clashed with Agnelli’s overly capitalist management style.

 

Net-net, time will tell whether or not Brazil and the other countries in the region learn the following very important lesson the easy way or the hard way: Big Government Intervention shortens economic cycles and perpetuates volatility. In some cases (see: US, Japan, PIIGS), too much government in the form of burgeoning debt and deficits has a funny way of structurally impairing growth. As consensus currently reminds you that they lack the Global Macro process to actually get ahead of slowing growth, keep these very important long-term TAIL themes front and center.

 

Darius Dale

Analyst


Retail: Bring It

 

Conclusion

 

Our bearish '4.5 Below' call for a severe cut in back half margins was bouyed by today's sales results. We remain bearish on the department stores -- in particular JCP -- and think that M and even KSS are setting up for a negative turn in the 2H. Same goes for HBI, GIL, JNY and DKS.

 

On the flipside we like names with asymmetric factors to drive upside, like NKE, LIZ (despite negative datapoint vis/vis JCP), FL, and despite broken near term TRADE, URBN and TGT.

 

 

Review of the Month

 

What started as a crack last month has turned into a clear deterioration in sales momentum for retailers in May. Recall last month, both Macy’s and Kohl’s called for pent up demand driven sales. Well, Macy’s pulled through posting solid results while KSS came in light much like the balance of retailers that still contribute to this monthly exercise. In fact, the number of companies missing expectations (14 of 22) came in higher than beats for the first time this year.

 

Instead of proving last month to be an aberration, May sales results lend further support to our thesis that the 2H set-up is not going to be a pleasant one. As expected, there wasn’t much in the way of adjustments to company lead expectations for the 2Q or the full-year with only a month into the quarter, however we suspect revision activity is likely to pick up in June as retailers get a closer look around the corner. Over the last month, we’ve seen increasing evidence of mounting margin pressure beginning to impact companies more significantly and sooner than expected and now we have top-line trends starting to roll as well. We saw a crack in 2-year comp trends last month for the first time since last July. Now this morning we have comps decelerating at an faster rate across all three durations (1Yr, 2Yr, & 3Yr) in May. With some retailers looking to accelerate sales in an effort to offset margin headwinds in the 2H, May results suggest that simply passing through higher costs will prove challenging in the face of slower consumer spending to say the least.

 

(clients that have not yet flipped through our industry overview outlining our scenario for a 4.5pt decline in industry margins this year, please contact sales at sales@hedgeye.com for a copy – we’d be happy to run through it with you).

 

Here are the notable callouts from May sales results:

  • Higher-end products and brands continue to outperform. Within department stores, it continues to be a story of the “haves” vs. the “have nots” with JCP -1%, KSS +0.8%, SSI +0.0% underperforming the higher-end with M +7.4%, JWN +7.4%, SKS +20.2%. This continues to be positive for stronger brands like RL and GES.
  • Discounters were again the strongest performing segment of retail consistent with trends since the holidays despite more difficult compares. We expect this to continue near-term as consumer’s propensity to spend on discretionary items deteriorates.
  • JCP came in well below expectations citing weather for the second consecutive week as well as a shift of promotional mailers into April - a factor the company failed to mentioned as a positive driver last month. After a handful of brand highlights in April, Sephora was the only callout in May with Liz Claiborne noticeably absent. Additionally, internet sales remain underwhelming contributing only +2.8%. However, the most notable callout (and red flag) is the absence of any comment on inventories. Last month the company dropped the verbiage that inventories were “in-line with sales trends,” this month they failed to mention inventory altogether. With the least attractive sales/inventory spread among its peers (KSS, M, JWN – see chart below), it looks like JCP is likely to maintain its laggard status over the near-term.
  • TGT also came in weaker than expected and again at the low end of their May comp guidance. We noted last month that grocery trends would be one of the more scrutinized items in this month’s release given that it’s a key driver of the +200-400bps in incremental comp and coming off a huge April. Posting a mid-teen increase is positive on the margin and suggests that strength in April was not an aberration. After riding this one down with a bearish view over the last several months, we have turned incrementally more positive on the name and think we’ll start to see a reacceleration in the top-line over the next 12-months.
  • Category performance also supports our view that discretionary spending has indeed tightened with grocery/food highlighted as the top performing category at both COST and TGT, while home and electronics were cited as common underperformers with price deflation to the tune of 10% in TVs still present. Additional category strength was noted in accessories (JCP, SKS, KSS, ROST, ZUMZ, TGT) and women’s apparel (COST, JCP, SKS, ROST). While recent strength in men’s apparel was noticeably absent at most retailers both JWN and SKS highlighted strength in men’s during the month.
  • COST again confirms our view on inflation with both fresh foods and food and sundries still up in the LSD-MSD range. In addition, gas contributed +4% and +4.4% to SSS for both COST and BJ respectively. Our view is that while this won’t be the first or second crack in the retail industry’s margin equation, it will add to the pain as the retailers choose to capture consumables inflation costs at the expense of discretionary product margins. (i.e can’t take up price on milk, eggs, and chicken – so look to extract margin in categories like underwear, shirts, toys, etc…).
  • Weekly trends suggest that traffic was clearly stronger in the 1H of the month with sales strongest in week 2 and slowest in week 4. Interestingly, TJX was the only company to note that more favorable weather at the end of the month has lead to a pickup in June.
  • On a regional basis, performance was more mixed than we’ve seen in quite some time. The most consistent callout was strength in the Southeast (COST, KSS, ROST, TGT, JWN) and both CA and FL at the state level while the Midwest was the most varied (positive: COST, TGT, JWN; negative: GPS and TGT). Yes even TGT straddled the fence calling out portions of the Midwest on both sides.

Retail: Bring It - TGT Matrix 6 2 11

 

Retail: Bring It - SSS Total 6 2 11

 

Retail: Bring It - SSS 1Yr Cat 6 2 11

 

Retail: Bring It - SSS 2Yr Cat 6 2 11

 

Retail: Bring It - SSS Dept SIGMA 6 2 11

 

Casey Flavin

Director


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next