Don’t look to the tribes to offset the precipitous drop in slot sales everywhere else. Their casinos are struggling too. Layoffs and expansion delays are indicative of the slowdown. Tribal casinos also tend to be more one-off in terms of location. In these less competitive markets, the pressure to offer the latest and greatest slots is diminished. Tribes do not have to buy slots either.

As we’ve written about extensively over the past few weeks, slot sales are likely to be down considerably in 1H 2009 after a likely strong December quarter. Slot sales to new casinos and casino expansions could be down around 50%. Replacement demand should fall as well despite an easy comparison, as corporate CFO’s reign in Capex to stave off liquidity issues.

Throw a tribal casino downturn into the mix and the picture isn’t pretty. The following are just some examples of tribes cutting back:

• Pechanga laid off 368 workers, or 8 percent of its workforce
• Morongo Casino, also in southern CA laid off 95 casino workers
• Thunder Valley Casino, managed by Station Casinos, stopped construction on a hotel and will likely downsize the project.
• Foxwoods laid off 700 workers.
• Mohegan Sun cut 600 jobs through attrition and there are rumors of layoffs for early 2009
• Odawa Casino in northern MI laid off 100 employees

Foxwoods laid off 700 employees

Thanksgiving: China's FXI gives us a +12% move yesterday!

There's nothing wrong with being late to the party and eating the left overs ... that's the way you should be looking at being long China from here... if you haven't been with us for this most recent ride that is!

China will be the only country in the top 10 GDP leaders of the world who will drive a high single digit GDP growth rate in 2009. Will growth be lower than it was at the peak? Of course, that's why we we're short it prior to the masses coming to grips with the reality that you shouldn’t be long everything "Chindia" at a global stock market mania top.

High single digit growth combined with low single digit inflation = buy China. They are cutting taxes, tarriffs, and interest rates alongside plugging in a $586B stimulus plan. Export growth will remain double digits, and China's trade surplus will stay in the area code of $275B (new record). Gravy anyone?

Have a wonderful Thanksgiving,

(chart courtesy of

Eye On Leadership: UBS Execs

The AFP broke this story overnight. Exemplary move for Thanksgiving. The "New Reality" is going to be a full scale exercise of earning credibility back, one day at a time.

"LUZERN (Switzerland) - Former senior executives at Switzerland's biggest bank UBS have voluntarily renounced about 70 million Swiss francs (S$88 million) in bonuses and wages, the bank's chairman Peter Kurer said on Thursday."


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Eye On Leadership: Obama Wisely Taps Volcker!

Today President-elect Obama announced the creation of the President’s Economic Recovery Advisory Board, a panel of outside advisers headed by 81-year-old Paul Volcker. [Compared to Secretary Paulson’s (aka Hank the Tank) selection of a 34 year old former Associate level investment banker as the Head of TARP, Obama wisely selected the universally respected Paul Volcker to head this Advisory Board].

As you recall, Daryl Jones’ posted on Volcker from 9/27 (Eye On Leadership: Volcker As Bailout Czar!) in which we laid our support behind “the 6’7, cigar chomping Princeton graduate” to lead financial policy under the new administration. While the Secretary of the Treasury went to Timothy Geithner, it is our hope that the experienced Volcker will be utilized, despite sitting outside Obama’s inner circle of advisors.

Volcker, who is credited for ending stagflation in the 1980s, played an integral role in turning around poor market conditions, recessionary growth, and rampant inflation. Volcker started his career in 1952 when he joined the Fed Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank, which he held until joining the US Treasury Department in 1962 as director of financial analysis. A year later he was promoted to deputy under-secretary of monetary affairs before returning to Chase Manhattan Bank as vice president and director of planning in 1965.

From 1969 to 1974 Volcker served as under-secretary of the Treasury for international monetary affairs. He played an integral role in 1971 repealing the 1944 Bretton Woods Agreements that pegged currency exchange rates to gold, crafting a new system in which the US dollar became the “reserve currency”.
A Democrat, Volcker was inaugurated by President Jimmy Carter on July 25, 1979 as the new Fed chairman. Known to be conservative, he fit the bill as the bright and able candidate from Wall Street, and made it his priority to end stagflation (a period of inflation with slow to zero growth). On October 4th September PPI showed a rise of 17% y-o-y, the largest increase in 5 years. Called to action, he inherited an expanding money supply that caused a weak dollar and a soaring trade deficit.

Taking charge in October Volcker cut the money supply by increasing the federal funds rate to a record 12% to clobber an inflation rate slightly lower than 9%. Into 1980, interest rates continued to rise and the economy sank into recession. Republican Ronald Reagan won the election in November 1980. By the middle of 1981 inflation topped 9.7% and dropped to 9% at year’s end. By 1983 Volcker’s constraint of the money supply showed positive signs. Despite unemployment of 9.7% in 1982, CPI for all of 1982 fell to 3.8%, from 13.3% in 1979 and the beast of inflation had been beaten.

We applaud President Elect Obama’s choice in Volcker. As we have outlined above, he is experienced, willing to make tough decisions against political winds, and respected far beyond partisan association.

Daryl Jones
Managing Director

Matt Hedrick

SP500 Levels Into The Close...

Buy investments down at the SPX 757 line (like we did), and sell strength up here on a low volume day into the close near the 895 line. See Chart - buy low, sell high.

MCD – Balancing Traffic and Margins

MCD’s decision to take the double cheeseburger off the dollar menu as of next week and raise the suggested retail price on the item to $1.19 is a welcomed move. Despite consistently strong same-store sales growth, MCD has faced declining U.S. restaurant margins for the last seven consecutive quarters.

The dollar menu currently accounts for about 14% of sales and the double cheeseburger has been the menu’s most popular item so a step toward increased profitability on this one menu item will help to improve U.S. margins. Although the higher price could impact traffic, I think it is more important that the company focus on margins. Additionally, maintaining the dollar price point in this environment of higher commodity costs has been the source of much friction among franchisees as they have watched their bottom lines suffer rather significantly despite continued traffic gains. At some point a decision needed to be made around traffic and margins, and MCD’s recent focus on the dollar menu had tilted the scales in favor of traffic at the expense of margins. Some franchisees, however, had clearly already chosen margins as they had already raised the price of the double cheeseburger and some are even charging more than $1.19, but MCD’s decision to follow with a system-wide price increase signals a level of support on the part of corporate.

MCD will be replacing the double cheeseburger with the McDouble on the dollar menu, which will still offer two beef patties but with only one slice of cheese (relative to the two slices of cheese on the double cheeseburger). The recent price of cheese was the primary focus of many franchisees’ argument for wanting to raise the prices of dollar menu items.

MCD’s traffic trends may experience some increased pressure from Wendy’s now that the double cheeseburger is no longer on the dollar menu as Wendy’s has been aggressively pushing its value trio promotion, which includes the Jr. Bacon Cheeseburger, the Crispy Chicken Sandwich and the Double Stack Cheeseburger, all for $0.99. As I posted back on November 5, a survey showed that the new value items are driving same-store sales but not profitability. Sound familiar? As I have said before, the restaurant industry is a zero sum game so if Wendy’s is experiencing a pick-up in traffic, it has to be coming from somewhere. Wendy’s market share gains could be accelerated by MCD’s changes to its dollar menu. That being said, I still think it was the right move by MCD from both a profitability standpoint and a franchise health perspective.

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