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Eye On China: Meet The New Boss

Chinese Banks land on the US Shore…

Following in the footsteps of Bank of China and ICBC, state-owned China Construction Bank (CCB) announced today that it will open its first US branch office in New York that will be primarily focused on commercial lending, trade finance, and foreign exchange. ICBC, China’s largest commercial lender, opened its first US branch in New York City in October while Bank of China, the most international of China’s banks, already has three US branches.

CCB, one of China’s “Big Four” state-owned banks, ranks second with 8.25 trillion Yuan (1.2 trillion USD) of total assets, behind Industrial and Commercial Bank of China (ICBC) and ahead of Bank of China and Agricultural Bank of China. The bank has approximately 13,629 domestic branches in addition to offices in Africa, Europe and elsewhere in Asia.

Former Bear Stearns exec, Ace Greenberg, commented yesterday that “its over” for Wall Street as we knew it. Nine and twelve months ago, I took plenty of heat for my “Hank The Market Tank” and “Investment Banking Inc.” calls. I wasn’t trying to be funny. I was being realistic. Now that this comic tragedy is playing at a theatre near you, it’s more palatable to talk to your friends about it at this year’s holiday parties.

It is natural next step for the new Chinese Capitalist banks to take advantage of their being liquid long cash and build a presence in the USA. We should be thankful for their arrival. We need new bosses in The New Reality. I am sure they are licking their chops borrowing at 0.00% for 3-month US Treasuries, then lending long higher – that’s what proactively prepared capitalists do.

We remain long China via the FXI and EWH etfs.

Keith McCullough
Chief Investment Officer

Matthew Hedrick


Aggregate Macau revenues in November were probably better than expectations, up 3%. However, growth has slowed considerably and will turn negative over the next few months. The flood of credit that permeated the market earlier this year has receded. Beijing’s tightening of the visa spigot prevents the mass market from filling the gap. It’s all about market share for awhile.

The most important take away from November is the continued market share loss in both Rolling Chip (RC) and Mass Market (MM) by Wynn Macau. Wynn lost almost 3% of MM share in the last 2 months, including 1.2% in November alone. On the RC side, Wynn’s share dropped 4.5% and 1.7%, respectively. At least as it relates to RC, the lost share is not related to luck. Wynn’s share of RC turnover fell 2.4% in November.

After 2 months of the quarter, Wynn Macau appears to be tracking below Street consensus for revenue. Unfortunately, Las Vegas will likely fall short as well. October Strip revenues just came out and they were horrendous, down 26%.

WYNN remains a great company with a terrific balance sheet and liquidity. While they are the best positioned in each of their markets, estimates need to come down, potentially materially. An early January pre-announcement is increasingly likely.

Trend vs. Trade – A look at CAKE, STZ, DF, WEN, SBUX and MCD

The multi-factor approach:

CAKE - CAKE, finally looks like it's a long, for a "Trade"…….

STZ - wine worked again today; STZ continues to flash + divergence on my screens as of late...

DF - DF looks ok still here; holding 15.07 is bullish, closing below that line puts 12.87 in play...

WEN - WEN, we sold well, but looks like a repo as long as it can hold 3.65….

SBUX - SBUX ran into the goal post (Canadian Football) and failed to hold on in the end zone at 9.44 today…

MCD - Big line in the sand here is 58.38… Ackman’s McDonald’s is not Kroc’s… inasmuch as Blankfein’s GS not being Marcus’

The Fundamentals:

CAKE – 60% of CAKE’s store base is located in the states that are exposed to the worst part of the economic down turn. As a result, the fundamentals are very ugly, but at some point that is baked in.

STZ – Working on a fundamental thesis

DF – If we can get past the Organic issues, the balance of the business is rock solid, but with leverage.

WEN – WEN is in a strong position to right size the ship.

SBUX – I just got an email from SBUX – Christmas is 20% merrier this year! December 9-15th As a SBUX Gold member, I now get 30% off my purchase…… Last week at the analyst meeting they were talking about not discounting in the store, but using discounts at other retailers like Costco and/or using a “card.” Did things change so quickly? However, not only can you get 20% off on all merchandise in

SBUX’s stores, you can also buy SBUX’s stock for 60% off from last year.

MCD – I’m concerned about where MCD is headed. I don’t like the premium coffee strategy in 2009. At the same time the $ is will significantly cut in the perception of how strong MCD growth is ….

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I'm Lovin' It

“The quality of a leader is reflected in the standards they set for themselves”.
~ Ray Kroc, Founder of McDonald’s

While the Governor of Illinois is being ‘You Tubed’ and shamed across the national media this morning, remember that getting rid of the compromised said leaders of this country is an integral part of the bull case associated with our Investment Theme for a “New Reality” in 2009. Transparency and Accountability will be a winner. Be on the right side of this leadership trade.

If you want to follow the losers, get yourself a chair and a TV set at 5PM EST, and get bogged down by “Fast Money” flashing charts of the early 1970s US stock market. Guys, where were these charts prior to the SP500 dropping 43%?  Do me a favor and stop being alarmist after a US market down day.

These charlatans of CNBC network emotion actually mentioned “behavioral finance” more than once on their show last night – they should spare us the one liner and pick up a book and educate themselves on the topic. As neuroscientist Richard Peterson appropriately points out in his latest behavioral book, “Inside The Investor’s Brain”, being self-aware is an important sign of intelligence. CNBC’s finest all share one unique characteristic – they are unaware.

Barack Obama is seemingly proving to be aware and I think that his standard of self confidence is one that Americans can buy on down days. I bought our 2nd tranche of the SP500 yesterday around the 886 level. There is significant support building at the 881 line, and this lines up pretty well with the political and confidence stats that were issued this morning.

After flashing a very oversold reading of -27 in one of my key sentiment indicators last week, this morning’s Institutional Investor Bullish to Bearish survey popped out of its hole to -21. We measure deltas here at Research Edge, because both math and what occurs on the margin of that math is what matters most to our multi-factor macro models. If you sold into the US market lows of last week or yesterday afternoon, it’s all one and the same by our scorecard – you sold alongside consensus, because you were probably unaware that you have become it.

In a surprisingly positive political poll reading overnight, the Bloomberg/LA Times poll flashed a 7 handle on Americans feeling better about the pending leadership in this country. Seven handle as in over 70% of Americans feel either “hopeful”, “optimistic”, or “proud” of Mr. Obama. After hearing plenty a market and political pundit trash this young man for being nothing but a speech maker, being long this market this morning feels as good as those polls did. I know, I know… polls are polls … and Obamerica is nothing but a place far far away from reality – but guess what, on the margin, I’d rather be there than in the Bushes.

Markets trade on sentiment. Multiples are based on confidence. If you don’t have either, go to cash. Building American confidence that there can be a Ray Kroc grinding away like he was in 1954 when he took over the McDonald’s franchise is what Americans not only want, but need. I am reading a headline this morning of one of the top 5 American muni-bond underwriters (Goldman Sachs) being waterboarded by the press for telling clients to buy CDS on New Jersey’s paper – this is the America of yesterday folks.

Neither Marcus Goldman nor Ray Kroc would have put up with a firm issuing NJ bonds, then advising others to short them. It’s ridiculous behavior. Rather than waking up to the embarrassment of the Illinois Governor this morning, these two Americans woke up every morning carrying the principles of true American Capitalism on their backs.

Chinese Capitalists continue to prove that they have read a book or two about the good old fashioned American days when Kroc would stand on his “handshake with spit.” As crude as that sounds, is as effective as trust is. The Chinese trust themselves. Stocks in Hong Kong raged higher again last night, despite “Fast Money” and Cramer whining about why they can’t be bullish on the USA yet. The Hang Sang closed up another +5.6% at 15,577, taking its “Re-flation” since the October 27th capitulation low to a +41% move! What? Did some investors miss that?

We remain long China, which also closed up another 2% overnight, taking its run-up in the last month alone to +21%, and Hong Kong via the FXI and EWH etfs. The best part about those analyzing China right now is that they are staring in the rear view mirror. Last night, China printed a horrendous export number of -2% year over year for November… but guess what? … its December. Stock markets do not trade on yesterday’s news. They are some of the most stealth leading indicators of the future that I have in my macro models.

The future in this country looks less dark than it did 3 months ago – that’s why I have taken our Asset Allocation model’s position in cash down from 96% to 54% in the last 3 months. We have a 12% position now in US Equities. On the International side, we own more China than any other country and we are also longer Commodities than we have been for all of 2008.

While “Fast Money” is flashing you those 1970’s charts, flash them a picture of one Ray Kroc buying the San Diego Padres on the cheap in 1974, or one of the many real estate sites he acquired while the lemmings were selling to him low. This is all part of that “Behavioral Finance” idea that dawned on Dylan Radigan last night.

Last night is over - I’m looking forward to today and tomorrow. I’m excited for the confident and liquid long American Capitalist who had his or her feet on the floor early this morning. I’m long San Diego real estate at a buck a foot. That’s in line with Kroc’s value menu, and “I’m Lovin’ It!”

Have a great day,

Long ETFs

SPY-S&P 500 Depository Receipts – CME front month futures contracts rose over 1.5% this morning reaching a high of 906.80 prior to 7AM.

XLV Health Care Select Sector SPDR – An advisory panel to the USDA unanimously backed a Genzyme Corp (XLV:1.6%) osteoarthritis drug.

GLD -SPDR Gold Shares –LME spot gold rose 1.3% to 787.11 per metric ton in trading this morning.

OIL iPath ETN Crude Oil – NYMEX front month Light Sweet Crude contracts traded as high as $43.49 this morning.

EWG – iShares Germany –A $15 billion government rescue of the US automobile industry is said to stabilize the parts supply chain in the US for German automakers BMW and Daimler. The DAX is down slightly in trading this morning to 4762.79, or -0.33%.

EWH –iShares Hong Kong –The Hang Seng closed up 824.52, or 5.59%, to 15,537.74.

 FXI –iShares China – China’s PPI rose in November 2% Y/Y, half the pace estimated by economists, after gaining 6.6% in October, representative of decreased commodity and energy costs. The Yuan rose to 6.86 against the dollar from 6.8651 before the producer-price announcement. The CSI300 closed up 55.54, or 2.74%, to 2096.39.

Short ETFs

EWU – iShares United Kingdom –The FTSE100 is trading slightly to the downside this morning to 0.86% at 4342.98, led by retailers, after Morgan Stanly said sales during Christmas could be the worst in many years.

UUP – U.S. Dollar Index –The Pound rose to 1.4796 USD, while the Euro remained close to flat at 1.2932 USD.

FXY – CurrencyShares Japanese Yen Trust –The Yen fell to 119.84 EUR and 92.71 USD  in trading this morning  while the Nikkei closed up 3.15% on expectations the government will extend aid to real estate developers.


We’ve liked this one. So far so good. As we discussed in our 11/11/08 post, “LIKE PEANUT BUTTER AND CHOCOLATE”, there is a decent likelihood that PENN makes a run at PNK. Furthermore, the valuation looks reasonable, even after the recent run-up. The stock is up 133% since our 10/29/08 opus, “A SHORT SQUEEZE COMMETH” highlighted PNK as having the most upside.

Analyzing operations is where it gets tricky. The removal of the Missouri loss limit in early November continues to have a positive impact and will probably result in at least 10% revenue growth. PNK probably reported the strongest Q3 of all of the gaming/lodging operators. Approximately 75% of the company’s EBITDA is generated in Louisiana. Due to the relative strength of the Texas economy this year, those markets have done well. As we discussed in our recent unemployment posts, the Texas economy is deteriorating, perhaps at a faster rate than most of the country. Given the recent strength, it is the delta here that is disconcerting.

The important metro markets for PNK are Houston, New Orleans, Cincinnati, St. Louis, and Dallas/Shreveport. The recent unemployment trends are charted below and they aren’t pretty, on a year over year and sequential basis. Given the size of PNK’s properties on those markets, the sequential trends in Houston and New Orleans warrant the most concern. Obviously, oil is a major component of some of these local economies so the escalating unemployment shouldn’t be a surprise.

Thus far, through early December, our sources indicate that gaming revenues have held up pretty well in Louisiana, despite the plunge in oil. Q4 probably looks as safe as any gaming operator out there. However, unemployment is a statistically significant macro factor in driving gaming revenues so Q1 could be at risk.

Unlike most operators, positive catalysts remain for PNK. If the Texas and Louisiana economies were to stabilize there would be no dilemma.

Despite the deteriorating unemployment trends in LA/TX, PNK's gaming revs there are holding up


The good news is that gaming/lodging earnings season is still over a month away. The bad news is earnings pre-announcements could happen at any time.

Many companies in the space no longer issue formal guidance so they may not feel the need to pre-announce. Generally, earnings and guidance look at risk. However, if Isle of Capri’s disastrous FQ2 with, nevertheless, an-up move in the stock is any indication, investors will generally shrug off any shortfalls.

The following companies have pre-announced in the past:

• WYNN – LV and Macau are under pressure. WYNN pre-announced negatively for Q3 (on 10/13) and could do so again for Q4. We think WYNN is very well positioned long-term but near term earnings could disappoint.
• PENN – The company pre-announced negatively on October 2nd so there is precedent. PENN, more than any other company should benefit from being on the right side of the liquidity trade. However, the near-term remains difficult. Lower gas prices have not yet made a meaningful difference. A pre-announcement is possible here as well but probably wouldn’t change the long term thesis.
• ASCA – The removal of the Missouri loss limit should offset some of the difficulty elsewhere. We do not expect any pre-announcement.
• BYI – We believe BYI is likely to meet or exceed FQ2 estimates. Although they have pre-announced favorable results in the past, they are unlikely to do so this quarter in our opinion.
• MAR – Marriott will probably miss earnings expectations and will most certainly lower forward guidance. We do not expect an update earlier than their regular earning release, however.

The following companies do not provide guidance and historically have not pre-announced earnings:

• BYD – BYD’s strong liquidity position vis-à-vis Station Casinos, its primary competitor in the Las Vegas locals market, should result in growing market share. However, this will take some time and in the meantime results could fall below sell-side estimates. Since management does not provide quarterly guidance we do not expect a pre-announcement.
• IGT – Considering the number of new casinos and expansions opening in the quarter, IGT should meet consensus expectations.
• WMS – We expect WMS to handily beat consensus earnings expectations. However, as we’ve written about extensively, slot sales should be down significantly in 1H CY2009. Analysts continue to project almost 10% revenue growth in that period. Management should cut forward guidance in their FQ2 earnings release.
• LVS – We expect Macau and Las Vegas to disappoint again in Q4. Any pre-announcement would likely coincide with an update on financing.
• MPEL – Macau centric, not good for earnings. Haven’t pre-announced since going public last year.
• HOT – Starwood could make the Q4 number but forward guidance should come down again. The company does not typically pre-announce.

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