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The Macau Metro Monitor, December 9, 2011



Las Vegas Sands mulls over tourism complex in HCM City Vietnam News Agency

According to LVS Chairman, Sheldon Adelson, LVS plans to build a tourism complex in Ho Chi Minh City at a cost of more than US$2 billion.  The complex, designed in the shape of two sails standing on a lotus, features hotels, restaurants, convention and exhibition centres, shopping, a spa area, gymnasium, theatre, museum and other entertainment places. 

Once completed, the complex is expected to become a symbol of Ho Chi Minh City , attracting more tourists to the city.  Le Thanh Hai, Secretary of the Ho Chi Minh City Party Committee, applauded LVS's idea of investing in the tourism and service sector in Ho Chi Minh City.  He affirmed that Ho Chi Minh City wishes to cooperate with LVS in the project.

Spread Risk: The Investment Implications of Widening Income Inequality

Conclusion: We don’t view the current income disparity in the U.S. as inconsequential; rather we expect to see that contribute to an increase in economic and financial market volatility over the long term as a result of heightened regulatory risk. This is an acute topic to keep in mind over the long-term TAIL.


Occasionally, intergovernmental agencies, like the OECD, publish detailed reports and datasets that we find useful in helping shape our big-picture thematic work. Most recently, we took a look at the data and conclusions provided in the OECD’s recent piece on global income inequality. Below we expand upon their baseline analysis to identify the potential investment implications of this international trend.


Data & Analysis

The OECD report provided data that shows income inequality generally increasing across the OECD, rising +9.7% over the last ~25yrs, on average, using the Gini coefficient as a standard measure of inequality. On this very measure, income inequality in the United States – which is the third-most unequal country in the survey – increased by +12.1% over the same time period. While not as dramatic as the deltas seen in the Nordic countries, it is a noteworthy delta as far as income inequality is concerned:


Spread Risk: The Investment Implications of Widening Income Inequality - 1


The OECD’s econometric analysis finds that the international trend in rising income inequality across developed countries was driven largely by changes in the distribution of wages and salaries – on average ~75% of household incomes among working-age adults across the OECD – and the change in hours worked across the socioeconomic distribution. The report finds that demographic trends such as ageing, a +700bps jump in the rate of “assortative mating” (i.e. couples where partners are in neighboring earnings deciles) to 40% on average, and a +500bps increase in the rate of part-time labor to 16% of the total employed population all played a key role in the aforementioned labor market developments.


On average, real disposable household income across the OECD grew at a +1.7% average annual rate over the last ~25yrs. The average annual rate of growth for the top decile was, on average, 1.4x times faster than the rate of growth for the bottom decile.  In the U.S., that ratio was 3.9x – meaning the top 10% of wage earners in the U.S. saw their real disposable household income grow nearly four times as fast as those in the bottom 10% over the last ~25yrs.


Spread Risk: The Investment Implications of Widening Income Inequality - 2


Unlike the OECD average, hours worked did not play a substantial role in perpetuating income inequality in the U.S. In fact, those in the bottom quintile of the U.S. earnings distribution saw their mean annual hours worked increase by +26.2% over the past 20yrs. That compares to a decline of -1.5% for the top quintile and -7.3%/-0.7% across the OECD’s average earnings distribution.


Spread Risk: The Investment Implications of Widening Income Inequality - 3


Looking at gross incomes across the OECD, which are found to be 34% more unequal than disposable incomes, on average, we see that the top 1% of earners accounted for 9.8% of all income (as of 2008/the latest data) – up +336bps (or +52%) from 1980 levels. The U.S. saw an even more dramatic delta and absolute level of gross income inequality – up +949bps (or +116%) from 1980 levels to a setup whereby the top 1% of earners accounted for 17.7% of all income. Additionally, the share of gross income earned by the top 0.1% of earners increased by a factor of 4x in the U.S. over that timeframe.


Spread Risk: The Investment Implications of Widening Income Inequality - 4


Spread Risk: The Investment Implications of Widening Income Inequality - 5


All told, over the past 2-3 decades, both income inequality and the disparity in work ethic have risen dramatically in the United States relative to other developed economies.  Additionally, the absolute levels of income inequality in the U.S. outpace levels seen in “peer” countries, suggesting that the U.S. may have more downside from a mean reversion perspective should the tide eventually turn – a topic we delve into more deeply in the analysis below.


Investment Implications

Among the many derivatives of unmitigated income disparity growth is social instability and/or unrest (i.e. #OWS). If unaddressed for too long, the unstable social pulse may eventually contribute to political and regulatory instability – particularly in democratic societies such as the U.S. (one man; one vote).


In a less-tangible form, the data and messaging provided in reports like the OECD’s may perpetuate the social Zeitgeist currently brewing around the U.S. – a Zeitgeist that is built upon feelings of resentment towards higher income earners, as well as a gut feeling that the “game is rigged” in favor of the wealthy elite.  Moreover, as constituents become more disgruntled, they are likely to demand that their elected representatives pursue protectionist measures, anti-globalization reforms, as well as additional oversight of the financial industry – the opposite of each are traditionally deemed as key contributors to income inequality in the developed world (though the OECD report claims to exonerate the former two).


As an aside, Chuck Schumer’s “anti-China” trade bill (S 1619) is an example of protectionist legislation currently being debated on by policymakers that could garner increasing support in the coming quarters. Refer to our recent note for more details. Obama’s “millionaire’s tax” idea and a potential rhetorical shift towards bad-mouthing the financial services industry – a strategy we contend he could pursue (like FDR did) if needed to galvanize populist support in the coming months – are to examples of real policy debates becoming increasingly focused on the heavily-skewed income distribution and financial services oversight.


While we have chosen to withhold our own opinions of what we think is the right mix of policy strategies to pursue for the country’s long-term economic and social prosperity (yes, both matter when policy is being designed), we do think that a shift in D.C. towards the aforementioned strategies is, on the margin, destructive to the U.S.’s 2012-15 economic outlook (and potentially beyond). Additionally, absent a major improvement in domestic labor market conditions, we can be all but assured some mix of regressive policy is likely to be pursued with increasing popular support – particularly if reports demonstrating inequality and unfairness continue to gain coverage at accelerating rates. The following articles demonstrate a shift of the reporting of popular skepticism and conspiracy theories away from lesser-known channels to larger media outlets:

All told, we don’t view the current income disparity in the U.S. as inconsequential; rather we expect to see that contribute to an increase in economic and financial market volatility over the long term as a result of heightened regulatory risk. This is an acute topic to keep in mind over the long-term TAIL.


Long live the principles of Transparency, Accountability, & Trust.


Darius Dale


FL: Ind Apparel Up, FW Down

Note, as it relates to mix between footwear, apparel and equipment, the major athletic retailers stack up as follows.


FL: Ind Apparel Up, FW Down - SG Mix


We’re seeing a continuation of the trends that emerged over the past few weeks. Apparel up, footwear down.


Athletic Apparel trends were strong last week posting a sequential acceleration as compares start to ease headed into the holidays. Underlying trends remain intact with the trailing 3-week rate increasing to 15% from 13% and 2Yr trends still running in the high-teens. Footwear sales, however, continued to the downside with growth slowing in running (~34% of FW) and Basketball (~20% of FW). We had been seeing a bifurcation in the basketball category, in that ‘performance’ shoes continued to post negative growth (-5%), while ‘hoops-inspired’ (~45% of total basketball) showed more signs of life. This trend reverted this week with the “inspired” category deteriorating sequentially down -11% from +10% (See Chart Below).


Perhaps most notable in the athletic apparel space is the continued strength in ASPs, which are +LSD-MSD again this week in the face of the ASP boost last year that started in mid-November. This is consistent with recent trends reflecting less elasticity in specialty athletic compared to both the discount/mass and family channels.


Here is some additional color on last week’s brand/category performance:


- Top line trends in all of the primary apparel categories improved on the margin. The most significant accelerations came in the compression and outerwear categories, which improved from +5% to +23% (good for UA) and +27% to +44% (good for VF), respectively.

- An interesting callout is that last week was the warmest first week of December in 10 years. While we’d expect better traffic coming through the stores, we wouldn’t think that cold weather gear would be high on the list. But we continue to see share gains in outerwear despite a strong start to the season (see chart below). The North Face gained 270 bps while COLM lost 93 bps of market share.

- All of the apparel brands’ top line performance improved sequentially which is representative of widespread industry performance improving into December.

- Champion continues to be the primary underperformer in apparel with sales down 12.3% to the tune of an 86 bps loss in share.  Again, we’d note that Champion is performing well at TGT, which is not represented in this data. But it also shows how the market is a zero sum game.

- Nike apparel had a nice spike last week, with sales growth improving sequentially up 12% from 7%,  and 17% from 5% for men’s and women’s respectively.

- Nike apparel has been erratic, but it’s core footwear business remains strong --  up nearly 400 bps in share.

- FW sales at price points greater than $100 were negative for the first time in 4 months (Chart Below). While 85% of the athletic FW industry (per NPD) is made up of shoes below the $100 price point, the negative data point is indicative of the week’s overall underperformance.

- UA continues to gain momentum in footwear, with its top line accelerating on the margin. This is exactly what UA needs to show in order to clear its inventory glut. While 33% growth off of such a low base is not much in dollars, the brand is actually in the early stages of gaining share in the FW market.   


FL: Ind Apparel Up, FW Down - FW APP Table


FL: Ind Apparel Up, FW Down - FW sales growth


FL: Ind Apparel Up, FW Down - FW MArket Share 


FL: Ind Apparel Up, FW Down - full apparel table


FL: Ind Apparel Up, FW Down - Fw category perfromance


FL: Ind Apparel Up, FW Down - apparel underlying trends


FL: Ind Apparel Up, FW Down - outwear chart


FL: Ind Apparel Up, FW Down - FW price bands


FL: Ind Apparel Up, FW Down - Basketball Footwear


FL: Ind Apparel Up, FW Down - FW APP 1 yr chart


FL: Ind Apparel Up, FW Down - FW APP 2 yr

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ECB Press Conference Substantiates That The “Bazooka” Is Off The Table

The ECB’s governing council decided to cut key interest rates by 25bps today. It’s main outlook on the economy, inflation, and monetary expansion, largely remained in line with last month’s report.


For more specifics, see this ECB press release:



The council also decided to add additional non-standard (and temporary) measures to better support credit to households and corporation by issuing 2 longer-term refinancing operations (with a maturity of 36 months) and lessening collateral requirements.


For more specifics, see this ECB press release:



However, more interesting than Draghi’s prepared comments, especially as it related to the likely outcome of tomorrow’s EU Summit, were his responses to the Q&A. Here he very definitively rejected any talk that the ECB may revert from its mandate of price stability, meaning monetary financing is off the table, outlining that neither the ECB nor the National Central Banks (NSBs) are in a position to print money to leverage/expand the EFSF or lend to the IMF to have funds redirected to member countries given “the spirit of the EU treaty”. These answers further confirm our stance that tomorrow’s announcements will mainly focus on a fiscal union, which will disappoint investors’ expectations (For more see today’s Early Look titled “Incredibly Hobbled”).  European equity indices and the EUR/USD fell alongside the announcement.   


Top 3 Q&A Responses:

- Why can’t the ECB act like the Fed or BOE to print money and directly aid countries?    MD: WE have a treaty that states the primary mandate is maintaining price stability, not monetary financing.  When the treaty was written in early 90s there were some countries suggesting financing governments by money printing. Our treaty embodies the best traditions of Bundesbank, where monetary financing is prohibited.


-Will the ECB aid countries through third parties like the IMF or EFSF? What about NSB lending to the IMF, would the ECB block? Is it legally allowed to?    MD: The ECB is not an IMF member. Legally complex, but given the spirit of treaty, the ECB can’t channel money to circumvent the treaty. If NSBs want to lend to the IMF, which would then lend to say China, that is fine. But if the IMF uses the money to buy bonds in Euroarea, this is not compatible with the treaty.


-Can you clarify your recent comments that “other elements will follow” about a Fiscal Compact?   MD: A compact = an agreement, or community pact. There are three pillars: 1.) national economic policies for stability, growth, and job creations; 2.) Rules at the EU level—that is fiscal rules enshrined in laws that place limits on deficits and debt. They would be automatic. 3.) Stabilization mechanism- we know the effects from lack of credibility and confidence, therefore pillars 1 and 2 are essential.   


Additional Q&A:

- Any call for a 50bps cut?  MD: No, discussed 25bps, some in favor, some not.


-How do you envisage the EFSF and ESM working together?   MD: EFSF first, ESM later, and fully operational as soon as possible.


-Thoughts on last Italian budget plans?  MD: Developments encouraging. It is a critical budget that will strengthen confidence.  Essential is in the delivery.


-Fear of deflation?   MD: Don’t see high probability of deflation.


-Is there a limit to bonds purchased by the SMP?   MD:  It is still a temporary program.


-Has the governing council discussed a cap on bond yields or spreads?   MD: No never discussed.


-Will slowing growth require more adjustment?   MD: Fiscal consolidation is unavoidable. What can be done to offset contraction?  Confidence Enhancing Effects - - structural reforms to enhance competitiveness and job growth… so [countries] can count on external demand, exports, [to grow].


-When you follow the headlines there are more breakup talks. Are they self-fulfilling prophesy?   MD:  What matters are facts, not psychology. If we make progress on a new EU contract, I think confidence will return.


-The money market is clogged up, and feels like post Lehman, true?   MD: We have a deposit facility at levels similar to the Lehman period. Despite ECB measures for liquidity, much of it is re-deposited with the ECB, so it’s not re-circulated. We’re also seeing deleveraging by banks which are significance. We see funding pressures as banks need to raise capital ratios. So to some extent, the measures today are to address these funding pressures.  Wider use of collateral and lengthening of term should give confidence to banking profiles, especially as a number of bonds come to maturity next year. I believe 230 Billion EUR of bank bonds are coming to maturity in Q1 alone. 



Matthew Hedrick

Senior Analyst


Investors may have trouble seeing the sun through the cloud of a weak FQ1 replacement quarter and a looming market share reversal.



And we’re not just talking about the weather which was cloudy and rainy all day for IGT’s investor day in New York.  Aside from talking about “Cloud,” which is a way to recoup some of their investment on a bad bet on sbX, there wasn’t a whole lot of new stuff at IGT’s investor day.  Much of the discussion was a recap of IGT’s recent achievement of “right-sizing the ship”.  The rest focused on new growth initiatives – two of which have been a mainstay at investor presentations for at least a year.


Our near-term issue with IGT is two-fold:  we think the company takes a large sequential ship share loss in F1Q12 since IGT pulled forward some sales into its fiscal year end quarter - especially in regards to replacements.  We expect that replacements will have a 3 handle vs. a 4 or 5 handle.  New opening share should also drop since IGT recognized both Kansas shipments while BYI and Konami did not.  We would caution that new opening and expansion ship share can shift if Revel and Cleveland units end up shipping at the end of this month instead of early calendar 1Q.  


We actually think calendar 2012 will be a great year for the suppliers, IGT included.  While we like the sector over the long-term, IGT will have to improve the economics of its gaming operations business to keep pace with the competition in terms of ROIC and free cash flow growth.  We estimate IGT spends about 15% of gaming operations revenue on maintenance capex, just to keep revenues stable.  By way of comparison, the average casino spends around 5%.  Unless IGT can spark growth, this is not an attractive business for them long term.




The big financial discussion centered on a revenue growth target of $500 million on top of the current $2 billion.  The company expects to generate an incremental $250MM from new business initiatives over the next 3-5 years on top of $250MM of growth from a recovery in replacement demand and the new domestic market openings.  Here are the three buckets of new business growth that IGT identified:  increased international penetration, Interactive, and Cloud.

  • While incremental revenue growth from new businesses will likely come in at lower margin channels, as long as IGT can leverage fixed costs or their “scale”, gross margins should increase.  This shouldn’t be a stretch:
    •  IGT continues to prudently deploy R&D dollars
    • SG&A has a variable component tied to sales and staff/infrastructure for new initiatives which don’t currently generate sales or profits are already in place
    • Product sale margins should improve as the number of units produced/sold increases as IGT will be able to leverage fixed costs over a larger base. The reduction in the number of platforms should also help margins.
  • Increasing international penetration
    • Bulls will point to Australia as an example.  IGT’s international strategy is twofold:
      • Global best practices and leverage scale by consolidating a lot of functionality across regions
      • Localize existing content by adopting a WMS-like strategy of more market research/customer focus sessions.  Importantly, IGT’s strategy is NOT to develop new content for local markets but rather to simply tweak their existing game library and math models to local tastes (this is part and parcel of Patti’s vision of increasing distribution of existing content and lengthening the “tail”).
  • Interactive growth
    • IGT’s strategy is to continue to grow the interactive division as more markets in Europe legalize gaming and leverage their recent Entraction acquisition by expanding their product portfolio into poker, bingo and sports betting.
    • Our take is that the growth in online gaming is very real, but it’s hard to evaluate the opportunity for IGT without any financial disclosure on their part. 
  • Systems
    • They’re doing their best to squeeze the most juice out of what was a bad investment.  Generally, IGT’s strategy for systems is one of a loss leader to gain floor share and potentially create a distribution channel for the content on some sort of recurring revenue basis.  This is especially true to sbX, which utilizes cloud technology to remove some of the largest feedback hurdles that casino operators face when presented with the sbX proposition – namely:
      • They don’t want to make that upfront investment
      • They don’t have the time, expertise, and in many instances space to run the servers necessary to deploy SB
    • Since IGT has already invested a lot of money into SB, Cloud allows them to deploy their technology at a minimal incremental cost to them and gives operators “easy access” to their content – whether that be game content or yield management analytics.  The hope is that this easy access will create a sticky “pay as you go” revenue stream for IGT. 
      • It’s really too early to tell whether this strategy will be successful or not since Cloud isn’t on schedule to become commercial for another year.  Our two cents is that as long as the cost to IGT is truly “minimal,” this could be a cheap option for the company to take a shot at recouping some of their investment. 


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Initial Claims Drop on Seasonal Factors

Initial claims dropped 23k last week to 381k, one of the best improvements in months.  Unfortunately, like the last eye-popping decline in claims (the week ended September 23rd), this one also looks too good to be true.  The Labor Department noted that seasonality is generally problematic this week of the year.  A typical seasonal increase is 182k, and claims actually increased only 151k.  Because the seasonal adjustment factor drives such a large piece of the data this week, it's difficult to take today's print at face value.  We would require several more weeks of confirming data to get more positive. 


We’ve previously identified 375k – 400k as the claims range where unemployment can begin to improve.  A sustained period below 400k would be meaningful for unemployment.  












2-10 Spread

The 2-10 spread tightened 3bps versus last week to 179 bps as of yesterday.  The ten-year bond yield decreased 4 bps to 204 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur


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