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MARKET ANALYSIS: ST. LOUIS

St. Louis is probably one of the most dynamic gaming markets in riverboat land. PNK’s Lumiere Place opened last year and another PNK property will open in South St. Louis County next year. A statewide referendum on the ballot in November could eliminate the loss limit in exchange for a 1% higher gaming tax rate.
  • We’ve done some revealing work on local housing prices as the most important driver of gaming revenues over the past 15 years (see “IT’S THE HOUSING STUPID, 7/17/08). We all know what is happening with housing nationally but it is instructive to view the variable on a localized level. As shown below, St. Louis homes did not experience the explosive pricing growth as other parts of the country. Gaming revenue growth was also more moderate. For this reason, I expect declines to be on the reasonable side as well which makes St. Louis one of the more attractive gaming markets. This is all relative of course.
  • The other attractive feature of the market is of course, the potential for the loss limit elimination. PNK and ASCA are the clear winners should the referendum pass. Polls indicate that a slight majority favor passage. Missouri remains the only state with loss limits in place, effectively repelling significant high end business. ASCA could experience a 10-15% net increase in EBITDA over time from the loss limit removal.
  • PNK appears on track to open in South County late next year which will negatively impact same store revenue. Ameristar and Argosy (PENN) look to be pretty insulated from the new competition. Harrah’s Maryland Heights will feel some impact but the major market share losers will be PNK’s own Lumiere Place and President, and the privately owned Casino Queen.
  • Given the horrendous results following smoking bans in Illinois, Atlantic City, and Colorado, everyone seems to be focused on this issue. We are fairly optimistic we won’t see a smoking ban any time soon in Missouri. A smoking ban proposal was last rejected in 2006.
  • ASCA generated 27% of its EBITDA in St. Louis and should be the prime “beneficiary” of less bad results in this market and the potential loss limit removal.
It's the housing, stupid!
On a relative basis, STL exposure is probably a good thing

POSITIVE ADR? I DON’T THINK SO

Smith Travel released their forecasts for the hotel industry today. For 2009, they are projecting a RevPAR decline of 2.5% but an ADR INCREASE of 1%. It looks like the fudge variable in that regression model of theirs may have been fudged a bit too much. It’s not simply a matter of hotel companies getting better at holding rate. At some level of demand, the yield and profit models will dictate lower ADRs. We believe that level will be reached next year. HOT’s guidance of down 5% RevPAR may even turn out to be aggressive.

JO: EYE ON COFFEE 3

We have been keeping our eye on bullish supply data points for South American Arabica recently. The demand side of the coffee equation is less clear, clouded by the impact of the economic slump on consumers as well as Asian capacity for Cheaper Robusta.

Global Coffee Prices spun into a nose dive in the late 80’s after the collapse of the International Coffee Agreement. As major US household brands like Sara Lee and Kraft shifted rapidly to lower quality Robusta and other cheaper grades, South East Asian growers began to ramp up production dramatically. Nowhere was this more pronounced than in Vietnam, which is among the largest global suppliers after less than a decade of rapidly increasing export levels.

Prices for Vietnamese exporters have fallen dramatically over the past month, with the Vietnam Coffee and Cocoa association reporting average levels of $1,700 USD per metric ton vs. $2,500 in February. Anecdotal reports suggest that there has been a pronounced decrease in buyers from Western Europe and the US combined with a sudden collapse of credit facilities for local brokers and traders. Meanwhile news reports from Indonesia, the second largest Asian producer, suggest that there has been a drop in demand felt there as well (a recent uptick in exports of Robusta is largely due to settlement of forward contracts dating back to early in the season).

The presence of low cost providers like Vietnam and Indonesia complicates the global coffee picture. Although they are primarily producing the less desired Robusta variety they have tremendous capacity and miniscule labor costs.


Andrew Barber
Director

Daily Trading Ranges

20 Proprietary Risk Ranges

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VOLATILITY: SEEKING CLOSURE

The VIX swung sharply higher today as options buyers rushed into the market at any cost. If you read our work you know that we look for spiking VIX levels as a signal of capitulation selling, but today’s spike feels more like a fund(s) being forced to cover short volatility positions as it does a true indication of sentiment.

Andrew Barber
Director

S&P LEVELS INTO THE CLOSE

Keith’s Trade line levels today are a buy at 858.33 and a sell at 945.36.

Andrew Barber
Director

INVESTNG IN THE DELTA

“Go west young man” – John Soule, 1851

Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.

So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.

I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.

But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.

In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.

Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.

I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.

Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.

The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.

Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.

The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.
Originally posted on the Hedgeye's Early Look portal

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 80.65%
  • SHORT SIGNALS 78.63%
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