A subscriber responded to our post on consumer confidence with a few follow up questions regarding which data series tended to have the strongest correlation. I sent him a quick note along with consumer confidence charted vs. unemployment and told him that it seems that the strongest correlation was to employment, and that a bottom in confidence tends to lead the unemployment spike slightly –something of a tautology (most see the writing on the wall, know that layoffs are coming and stops spending before the pink slips actually arrive). In his follow up note he said that he expected “the stock market should in theory be acting similarly to prior periods entering recessions although w/more voracity this time b/c of housing”.
The part that I stumbled on was “acting similarly to prior periods entering recessions”. I charted confidence vs. unemployment since the Consumer Confidence Index was created in 1967 to arrive at a channel to gauge points of maximum pessimism. In the year following each of the five inflection points the S&P had positive returns. What’s more, four out of five realized double digit gains greater than 15%.
This is pretty intuitive stuff. From a market psychology standpoint, looking at the convergence of consumer pessimism and unemployment as an indicator may provide a valid rear view mirror indicator. In each of these historical periods an investor that took long positions in the quarter subsequent to improving confidence numbers was rewarded.
Now that we have an effective Greenspan free money 1% Fed Funds rate, I think we’ll see enough cash deployed in November to keep this short term "Trade" rally alive. Consensus is on the other side of that idea. The bulls have guns, and the bear shorts are on the run. This is all good for stocks.
Bernanke has acknowledged that the economy has slowed "markedly" and that "risks to growth remain"… gee, thanks. Since he has been looking for inflation to slow for well over 2 years, I don’t think what he thinks on inflation matters.
At 1% interest rates, I don't get paid to be in cash. Every asset class has time and a price. Look for us to continue to decrease our position in US Cash, and increase our exposure elsewhere. The US Dollar is getting whacked again today. We remain short it via the UUP etf.
Our immediate "Trade" target for the S&P500 remains 1016.
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If you have been reading our work you know our thesis: despite the leveling trajectory a maturing economy, China’s private sector will increasingly focus on growing internal demand, and that in turn will feed a growth pattern that will continue to greatly outpace the US and EU on a relative basis. This rate cut should bolster internal domestic consumption in China help prove us right.
Having said that, gaming operator stocks are trading at all-time lows. Some, BYD, PENN, WYNN, and even PNK, have liquidity to ride out the storm. Free cash flow for BYD, PENN, and WYNN is actually accelerating. But I’ve made this point for a few months and there has been little divergence in the stocks.
When will gaming stocks start going up? There are signs that it could be soon. Not only soon, but the moves could be big. Gaming is now a heavily shorted sector in need of a catalyst. Consider the following:
• October vs September– In the regional markets, September was awful from a revenue standpoint and could mark a near-term low. Our channel checks in the regional markets indicate that October is much improved.
• High short interest – The first chart shows the heavy short interest in the space
• Getting toxic earnings and guidance out of the way – Expectations for Q3 earnings and forward guidance is appropriately low. So far, stocks have gone up following the releases.
• Gas prices – We’ve shown that gas prices are a statistically significant driver of gaming revenues in the regional markets. As the second chart shows, gas prices have come down considerably.
• Month end – Sell the losers into month end! Not many bigger losers than gaming.
• Macro November thaw call – Keith McCullough has gotten more positive on the market, due in part to credit spreads improving
• Winding down of selling by big, long-only funds
• All time low valuations – leaving plenty of upside
At the very least, it seems that staying short this sector right now could be a dangerous game. We still maintain a negative intermediate consumer call here at Research Edge as consumers de-lever and the savings rate escalates. However, the trade looks higher. The safer plays that would still offer significant upside in a short squeeze are probably those companies on the right side of the liquidity trade: BYD, PENN, and WYNN. BYD and PENN have already announced earnings.
If you believe me on the thesis, the most interesting play could be PNK. Earnings will be released next week on Thursday. I expect a less than toxic Q3. More importantly, management should be able to allay liquidity fears on the conference call. There are no covenant issues until possibly Q2 but the company has a lot of levers to pull to maintain the appropriate leverage including, cessation of construction in St. Louis, cost cutting, and a temporary cut in maintenance Capex. Secondly, we expect a fairly upbeat discussion of October trends versus September. PNK actually maintains exposure to the stronger performing markets.
There seems to be a lot of upside to a stock at $2.75 per share and with 20% of the float short if investors could be convinced that: a) business has not fallen off a cliff and b) the company is not going bankrupt.
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