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INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST

Distortions in the Seasonal Adjustment Factor

After our claims post last week, "The Ghost of Lehman," we had a number of clients ask us if we could quantify the effect we discussed.  Lehman's Ghost is a distortion in the seasonal adjustment factors that the Department of Labor is using to treat jobless claims arising from the shock in the series in late 2008 - early 2009.  The Labor Department uses a five-year lookback in constructing its seasonal adjustment factor, which means that the '08-'09 shock continues to skew the data.  Essentially, the seasonal adjustment sees the increase in claims in September 2008 - February 2009 and reads it as a seasonal factor rather than as a bona fide shock. 

 

To estimate the extent of the distortion from the seasonal factor on this week's data, we examined the YoY increase in NSA claims in February 2009 (+88%) and then backed out the average YoY growth from September 2008 to February 2009 (+60%).  So the February 2009 growth is 28% above trend, YoY.  This should be a rough approximation of the contribution of the seasonal factor from that year.  Since the overall seasonal adjustment takes a five-year average, we divide this number by five to get a 5.6% increase.  The conclusion is that this week's claims data is 5.6% understated.  Instead of being 351k, it should really be 372k.

 

What's Next? 

This week of the year captures the maximum benefit from the distortion - i.e. claims are understated in the last weeks of February by the largest amount.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 

 

Over the last year, claims have generally moved lower YoY (NSA) by around 10%.  Off of a base of 350-400k, this implies 35-40k improvement this year, or around 3-4k per month. This underlying trend is thus overwhelmed by the distortion for the next few months (as true improvement is masked by the understatement/tailwind reversing).  

 

This Week

The headline initial claims number rose 3k WoW to 351k (staying flat after a 3k upward revision to last week’s data).  Rolling claims fell 7k to 359k. On a non-seasonally-adjusted basis, reported claims fell 20k WoW to 345k.

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - Rolling

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - Raw

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - NSA

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - s p claims

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - Fed and claims

 

2-10 Spread

The 2-10 spread widened 5 bps versus last week to 170 bps as of yesterday.  The ten-year bond yield increased 7 bps to 201 bps.

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - 2 10

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - 2 10 sprea by quarter

 

Financial Subsector Performance

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

 

INITIAL CLAIMS: QUANTIFYING LEHMAN'S GHOST - Subsector

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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MGM TRADE UPDATE

Keith bought MGM in the Hedgeye Virtual Portfolio at $13.91.  According to his model, the TRADE support line is $13.52, and the TREND support level for MGM is at $11.68.

 

 

MGM is not for the faint of heart.  The stock has been on a tear YTD, rising 35% compared to a 8% gain in the S&P.  That’s what a lot of financial and operating leverage will get you in an improving environment.  Much of the investor optimism is attributed to better than expected performance on the Las Vegas Strip in Q4, which was confirmed in yesterday's conference call.  MGM derives over 60% of its EBITDA from the Las Vegas Strip.  While investors have focused on room rates – which have been strong – we think the incremental catalyst is slot volume.  That’s where the leverage is on the margin.  With a high debt levels and a fixed cost operating structure, continued improvement in Strip metrics will have a high flow-through to the bottom line, benefiting results in 2012 and beyond.

 

MGM TRADE UPDATE - mgm


ISLE F3Q12 CONF CALL NOTES

ISLE F3Q12 CONF CALL NOTES


"Net revenues increased at eleven of our fifteen properties, including each of our properties outside of Mississippi, where the markets have been slow to recover from the flooding last spring and economic issues continue to negatively impact the market. We are continuing to utilize smarter marketing and targeted facility improvements to drive business and improve results.  Our operating successes in Florida, Colorado, Iowa and Missouri were able to largely offset the substantial difficulties facing the Mississippi markets and costs we incurred in Lake Charles while renovating the gaming floor of our primary riverboat and preparing to consolidate our operations."

 

- President and Chief Executive Officer Virginia McDowell

 

PREPARED REMARKS

  • Cape G is similar to their operations in Waterloo, Iowa and Boonesville Missouri
  • Getting started on room remodel for the Lake Charles property
  • $1,165MM of debt with $496 term loans, $10MM on R/C. Have $200MM of borrowing capacity at the end of January 

Q&A

  • Lake Charles had a lot of noise in the quarter with the ongoing renovations at the property
  • Paid down about $15MM of debt in the quarter. At the end of Oct they have $1.184BN and Jan they had $1.165BN
  • They think that the cost savings on the sale of the vessel in Lake Charles will be at least neutral to them if not beneficial.  
  • Sub debt becomes callable at par next month.  They will start to look at redeeming some of those notes opportunistically.  They also have some options on refinancing those notes 15-18 months before their maturity
  • Lake Charles will go from 1,782 to 1,262 slots, 51 tables to 40. No change in hotel rooms - still at 440-450.  They used the vessel for overflow on weekends and holidays so it shouldn't be an issue from a capacity standpoint. They are thinking about a potential on the 3rd deck if necessary - more likely for poker. 
  • Mississippi has been really challenged since the floods. Part of it is due to the tracks in Arkansas which had a big spike in business when the casinos in MS closed for flooding and only some of that business came back.  Biloxi was already weak before the floods. They had a lot more customers in that part of the country that had high teens unemployment and then also had a heavy impact from the floods
  • Impact of new competition on their Kansas City facility?  Geographically, we're the property that is farthest away, and with the construction complete on the bridge, traffic is flowing around and through to our property better than it did before. 
  • They can structurally take out the sub notes before the 7.75% seniors come due. As long as they meet the 2 to 1 covenant restriction within 15/18 months to maturity they can refinance those notes with Senior notes
  • The total business interruption receivable will be a lot larger than what they have received thus far. The discussions with BP were one time and separate from the insurance flood receivables. 
  • Pompano: no impact from Seminole Coconut Creek expansion.
  • They didn't quantify the impact from disruptions at Lake Charles. Aside from the hotel the casino floor disruption is done
  • Capex spending for Cape: 
    • $80MM left to spend. $20MM ish in the 4Q. Generally speaking, 50% of the spending is right at the end because that's when the FF&E gets ordered. 
  • Their leverage is 6.3x vs. 7.35x steps down after Cape opens in F4Q13 (one year from now)
  • Database skews more South and East than West in the Kansas City market. 
  • Thoughts on new opening in Biloxi? 
    • No
  • Step up in promotional spending. Will some of the new projects under way will they see more promotional spend?
    • Most of it was customer reinvestment.
    • Spike was temporary and surrounding new product launches at various properties
  • Majority of Iowan's are still against online poker
  • Cape G is tracking at or under budget

 

HIGHLIGHTS FROM THE RELEASE

  • "We are looking to the future with optimism as we expect to open our Isle property in Cape Girardeau, Missouri by Thanksgiving of this year, subject to regulatory approval, at least a month ahead of our previous schedule."
  • "The Company's results benefitted from increased retail play as a result of generally favorable weather conditions in December and January, several recent facility improvements and continued strong marketing programs."
  • "In Boonville, revenue increased by 3.3% and EBITDA increased by 8%, despite having a buffet closed for renovation during the bulk of the quarter."
  • "With the recent declines in the unemployment rate, we are cautiously optimistic that our retail play trends could continue to improve as we have historically seen a high negative correlation between the unemployment rate in our markets and retail revenues."
  • "Our properties in Mississippi are suffering from a lagging economy and some lasting effects of the flooding which has impacted our overall results. Competition from race tracks in Arkansas, which increased following the floods, impacted revenue streams from Little Rock and several secondary markets."
  • "In Lake Charles, results were directly impacted by renovation disruption, which was completed in early February, and preparing to consolidate operations onto the larger remaining riverboat. We opened a new poker room, installed new carpet on the casino floor and completed other cosmetic refurbishments. We made the decision to invest in improving our product offering during the second and third fiscal quarters, and we believe we are beginning to see positive financial results from that investment. Additionally, we expect to benefit from a lower cost structure now operating only one facility.  We will continue to improve the customer experience with a $15 million refurbishment of the main hotel tower, which is expected to be completed by the end of the second quarter of fiscal 2013."
  • "We are also continuing to upgrade our food and beverage options across the portfolio."
  • "At Rainbow Casino in Vicksburg, we expect to complete the Lady Luck Casino rebranding by the end of the second fiscal quarter of fiscal 2013.  The rebranding will introduce upgraded amenities"
  • "Our upgraded customer rewards program, called Fan Club, is now active in Pompano and Waterloo." 
  • "The decrease [in corporate expense] is primarily due to development expenses in the prior year related to obtaining the Cape Girardeau and Nemacolin licenses.
  • "In the third quarter of fiscal 2012 we recognized $0.9 million of revenue as partial advances of our business interruption claim. Through February 22, 2012 we have received initial payments of $10.1 million related to the claims."
  • Nemacolin Woodlands Resort, Pennsylvania: "The appeal hearing for the gaming license awarded toNemacolin Woodlands Resort for the final resort license in Pennsylvania has been set for March 7, 2012. "
  • 3Q Capex: $11.7MM ($4.5MM related to Cape Girardeau)
  • "Capital expenditures for the remainder of the fiscal year to be approximately $45 million, including approximately $20 million in Cape Girardeau."

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THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Initial jobless claims came in at 351k for the week ended 2/18 versus expectations of 355k and 351k the week prior (revised from 348k).

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - initial claims

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - subsector

 

 

QUICK SERVICE

 

JACK: Jack in the Box reported comps ahead of expectations: +5.3% at Jack in the Box and +3.8% at Qdoba versus expectations of +4.1% and +2.9%, respectively.  EPS came in at $0.27 versus $0.25 expectations.

 

JACK: Jack in the Box was reiterated “Buy” at Lazard.  The firm notes that average check appears to be improving along with better traffic, which could indicate a successful shift from heavy discounting, according to Street Account. The price target is $28.

 

THI: Tim Hortons reported 4Q EPS of C$0.65 versus consensus C$0.62.  Comps in Canada grew +5.5% versus consensus 4.8%.  U.S. comps came in at +7.2% versus 4.2% expectations.  The company announced a new $200m share repurchase program.

 

CBOU: Caribou reported 4Q EPS of $0.14 versus consensus $0.16.  Comps increased 5.6% in the quarter.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SONC: Sonic traded down -3.3% on accelerating volume.

 

PZZA: Top-line miss pushed the stock down -6.9% on accelerating volume.

 

 

CASUAL DINING

 

DRI: Darden prereleased 3Q (quarter ended 2/26) earnings of $1.23-1.25 versus consensus $1.19.  Blended U.S. same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse for 3Q will increase approximately 4% versus 2% consensus.  FY12 blended comps guidance was reaffirmed at +2.5-3.0% and FY12 EPS growth from continuing operations guidance was reaffirmed at 4-7%, consistent with prior guidance.

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - og pod1

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - RL pod1

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - LH pod1

 

 

TXRH: Texas Roadhouse was reiterated “Buy” at Miller Tabak and the price target was raised to $21 from $19.

 

CBRL: Cracker Barrel PT raised to $62 at Morgan Keegan.  The stock is rated “Outperform”.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

TXRH: Texas Roadhouse gained 6.7% on accelerating volume on strong 4Q EPS.

 

CBRL: Cracker Barrel took a step back after trading strongly on 2QFY12 EPS.

 

CAKE: 1Q12 guide-down hurt the stock yesterday.

 

THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


SINGAPORE: IS THE HONEYMOON OVER?

It's become clear that Singapore benefited from a significant honeymoon period.

 

 

It happened sooner than we thought.  The number of Singaporean visitors to the Integrated Resorts is falling.  Many markets/casinos experience a honeymoon period but this looks unprecedented.  Of course, we shouldn't forget that the Singapore market exploded out of the blocks.  We still expect 2012 growth but it certainly won't come from the local population.

 

Genting Singapore mentioned a couple of quarters ago that mass market growth has been limited by a stagnant local population and inability to promote gaming to locals.  According to numbers released by Acting Minister for Community Development, Youth and Sports, Chan Chun Sing, total Singaporean visitation for the two integrated resorts dropped 22% YoY.  At RWS, the number of local gamblers fell by 31.7% from 199,783 in 2010 to 136,434 in 2011.  For MBS, the number dropped by 8.9% from 150,691 in 2010 to 137,259 in 2011.

 

This data provides further confirmation of our view that Singapore growth will moderate significantly in 2012.  Without more rooms or junket approval, Singapore growth might slip into the single digits in 2012.  See our note GENTING BLOWS IT (2/23/11).


THE M3: FEWER S'PORE LOCAL CASINO VISITORS; OKADA; MACAU VISITATION; S'PORE CPI

The Macau Metro Monitor, February 23, 2012

 

 

DROP IN LOCAL GAMBLERS VISITING RWS AND MBS CASINOS IN 2011 Strait Times

Some 200,000 Singaporeans visited the two casinos here in 2011, said Acting Minister for Community Development, Youth and Sports Chan Chun Sing.  The number of domestic casino gamblers at each of the casinos also dropped from 2010 to 2011.

 

At RWS, the number of local gamblers fell by 31.7% from 199,783 in 2010 to 136,434 in 2011.  For MBS, the number dropped by 8.9% from 150,691 in 2010 to 137,259 in 2011.

 

WYNN AIMS TO KICK OKADA OFF MACAU BOARD FRIDAY Reuters

According to sources, the nine-person Wynn Macau board - which includes five members with ties to Wynn - can take unilateral action to drop Okada from among their ranks this Friday.  The Wynn Macau unit can take action on its own but parent company Wynn Resorts cannot remove Okada from its 12-person board without first convening a special shareholders' meeting.

 

MACAU VISITOR ARRIVALS FOR JANUARY 2012 DSEC

In January 2012, total visitor arrivals surged by 18.6% YoY to 2,461,640 attributable to the Lunar New Year holidays.  The average length of stay of visitors decreased by 0.2 day YoY to 0.9 day.
     
Visitors from Mainland China increased by 22.5% YoY to 1,494,877 (60.7% of total), mostly from Guangdong Province (777,564), Fujian Province (65,966) and Zhejiang Province (51,549).  Mainland visitors traveling to Macau under the Individual Visit Scheme (IVS) totaled 711,475, up 32.2% YoY.  The average length of stay of Mainland visitors was 0.9 day.

 

THE M3: FEWER S'PORE LOCAL CASINO VISITORS; OKADA; MACAU VISITATION; S'PORE CPI - VISITATION

 

SINGAPORE SEES VOLATILE INFLATION AFTER SLOWING IN JANUARY BusinessWeek

S'pore CPI rose 4.8% YoY, beating consensus of 4.7%.  The core inflation rate was 3.5%.   Singapore's Monetary Authority of Singapore said inflation will remain “elevated and volatile” in the next few months even after consumer price gains eased to the slowest pace since May.  It added that core inflation may be about 3% for the next few months.


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 80.28%
  • SHORT SIGNALS 78.51%
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