The Search for Value

“Freedom, however is not the last word.  Freedom is only part of the story and half of the truth. Freedom is but the negative aspect of the whole phenomenon whose positive aspect is responsibleness.  In fact, freedom is in danger of degenerating into mere arbitrariness unless it is lived in terms of responsibleness.”

                -Viktor E. Frankl


“Man’s Search for Meaning” by Victor Frankl is one of my favorite books.  It is the chronicle of Frankl’s experiences in Nazi Germany’s concentration camps and was written in 1946 shortly after the end of World War II. The book has sold over 10 million copies and is often noted on the lists of the most influential books in the United States.


Frankl was uniquely qualified to analyze the experiences in a concentration camp as he was a psychologist by training.  Undoubtedly, his academic training allowed him to separate his actual experiences from the analytical lens under which he observed his, and other prisoners, broad experiences in the camp. 


Ultimately, Frankl concluded, from analyzing the broad collection of experiences in the concentration camps of Nazi Germany (he himself lost the vast majority of his family), that life never ceases to have meaning.  In fact, according to Frankl, there is meaning in every moment.  Further, we all have the freedom of choice, even if our circumstances are incredibly dire.  In fact, the only scenario that truly dooms a person is when they lose all hope.


Now, admittedly, this is deep stuff for a Tuesday morning.  Further, it is obviously not even close to analogous to compare our lives as stock operators to Frankl’s analysis of life in a concentration camp, except for the fact that both are about a search.  For Frankl, it was the search for the meaning of life.  While for stock market operators, it is the search for value.


At the end of the day (to use an overused expression), investing is solely about value.  For those that follow more quantitative strategies, value can simply come in the form of the price and volatility of the asset.  For those steeped in more fundamental company analysis, value comes from deriving a value for company on both a standalone basis and versus comparable companies.


As many of you know, the vast majority of our firm is comprised of fundamental analysis.  In fact, we currently have seven sector heads doing fundamental company and industry research.  In aggregate, we cover energy, industrials, retail, gaming lodging & leisure, healthcare, financials, and restaurants & food processing.  Similar to a multi-strategy fund, we also integrate both macro analysis and quantitative analysis into our research process. 


In earnings season, we get bottom up data points that combine to inform our macro view.  On face value, based on data from Zack’s, earnings season has been reasonably positive.  In fact, as of yesterday 300 companies in the SP500 had reported earnings and aggregates earnings were up 5.5% versus the same period last year and almost 2/3rds of them beat earnings estimates by an average median surprise of 2.8%.  As always though, the devil is in the details, especially in the search for value.


A key driver of this “not too bad” earnings season is the easy comparisons of the financial sector.  In fact, if we back out the financial sector earnings reports, the positive 5.5% growth noted above actually becomes a year-over-year decline of -1.5%.  Moreover, revenue performance has been particularly anemic with revenue coming in basically flat versus the same quarter last year (including financials) and only 1/3 of companies beating revenue expectations.


If you are a fundamental equity investor, you are likely either looking for stability of cash flow or cash flow growth to justify your valuation.  Unfortunately, not many discounted cash flow models spit out compelling valuations if cash flow is declining on a year-over-year basis.  Thus, from a top down perspective, the old adage that the market is cheap based on its multiple doesn’t hold much credence when earnings are declining, and not growing, versus the prior year.


Just as important as this quarter are future earnings and revenue expectations.  Typically, fundamental investors focus on earnings seasons as a key catalyst to for the market to reward them for the hidden value in their investments.  Currently though, future earnings growth expectations are very high with Q1 2013 consensus earnings growth at 12.9%, Q2 2013 at 13.0%, and Q3 2013 earnings growth at 16.4%.  Given the GDP growth outlook, these numbers will be coming down meaningfully.


The search for global macro value will begin in earnest tonight and tomorrow.  Tonight, we have Chinese Purchasing Manager’s Index at 9pm.  While tomorrow we get the PMIs for both Europe and the United States.  Based on the collective macro data points we’ve been analyzing, there is no reason to believe this slew of data points will do anything but reinforce our thesis that growth is slowing.


Ironically, the Chinese stock market seems to be the one market that is credibly signaling this continued slowing of global economic growth.   Chinese stocks were down another -0.3% over night and are now down -14.5% since May.  This despite rumors that Premier Wen will boost stimulus measures in China in the second half of 2012.


In the Chart of the Day, we once again highlight the VIX.  Currently at 18, the VIX is not completely bombed out, but we would stress that it is at a level where you don’t want to begin your search for value in earnest.  This is a point that has already been fundamentally validated by earnings season and will be reinforced as future earnings expectations are lowered.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $102.52-108.36, $82.33-83.23, $1.20-1.23, 6, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research.


 The Search for Value - chart2


 The Search for Value - VP


In preparation for ASCA's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary



Ameristar breaks ground on Lake Charles casino (July 19) 




  • "We did a transaction subsequent to the end of the quarter raising $240MM as an add-on to our existing 7.5% senior notes, which are due 2021. The terms are exactly the same as that note. They were issued at a premium of 103% generating yield of 6.88%, total amount of notes outstanding now are $1.4BN. Proceeds from the offering were used to completely pay down our revolver including $25MM we borrowed early in April... This obviously creates great flexibility for us to finance the Ameristar Lake Charles project"
  • Guidance: 
    • Stock base compensation: $3.5MM to $4MM for 2Q12 and $14.8MM to $15.8MM for FY2012
    • Deprecation: $26.5MM to $27.5MM in 2Q12 and $105MM to $110MM for FY2012 
    • CapEx: $20MM to $25MM in 2Q12 (including some small amounts for Louisiana) and FY2012: $160MM to $165MM (including expenditures on Louisiana)."
    • Tax rate:  "going forward should be somewhere in the neighborhood of 39% to 41%... 43%, 44% it was historically... the weighted average rate for this year should be somewhere roughly 27% to 29% based on the impact to the tax rate during the first quarter."
    • Interest expense:  "should range between $20MM and $29MM it will increase slightly on an annualized basis to $109MM to $114MM. Beginning in 2013 as you would expect there'll be capitalized interest, it will start to grow related to Louisiana probably which will offset the net increase we're seeing in interest expense from the increase in the outstanding notes versus the revolver."
    • Non-cash interest: $1.1MM to $1.6MM in 2Q12 and $5.3MM to $5.8MM for FY2012 million 
    • Corporate expenses: $12MM to $13MM in 2Q12 and $52MM to $53MM for FY2012. 
    • Share count: 34MM to 34.5MM
    • Dividends: "Board of Directors just recently approved a $0.125 dividend for the second quarter. If the dividends are continuing to be approved by the Board in the third and fourth quarter total amount of dividends for the year will be $0.50."
  • New Lake Charles casino
    • Completion: 3Q 2014
    • Gaming: 1,600 slots/ 60 table games
    • Hotel: 700 roomswith approximately 70 suites
    • Other amenities: Variety of food and beverage outlets, spa, pools, golf, tennis and other resort amenities, 3,000 parking spaces including 1,000 of them in a garage. 
    • Capex: $500MM
    • "We don't expect to borrow much under the revolver in 2012 as we believe we can fund much of the CapEx with free cash flow. And we think the strength of the market is actually proven up by the first quarter results and we expect that to continue to be a growing market."
  • "In Springfield the demolition and site grading are almost complete. We expect to take control of the property by
    the end of May."
  • [Kansas competition] "I think another quarter or two and we'll start to get a more stabilized trend line of what things are going to look like, but we're very encouraged by the strength of our Kansas City property. We've always said it's the best quality property in the market, it's the furthest away from the competition and I think we're going to do just great."
  • [Lake Charles market] "There'll be probably some cannibalization, but I think we're probably going to be cannibalizing some of the operators perhaps more than we will L'Auberge."
  • "I don't think consumer confidence has seen a huge boost... They've had lower utility bills this year versus last year where they've had a little bit higher gasoline prices. Employment is changing in some respects in some of the markets. But I think ... people are still being a little guarded with how they're spending. I don't see long-term trend lines developing yet."
  • "East Chicago I think will continue to be a strong player in that market. I think the bridge will help us some if it can happen, but we're moving along on the assumption that it never happens and running the property accordingly and I think it's working very, very well."

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“If you’ve got a business, you didn’t build that.”

-Barack Obama, July 16th, 2012


Really? I couldn’t make up what the President of The United States said (off teleprompter) yesterday in Roanoke, Virginia if I tried. I guess I should send some wine to Barry and Timmy for keeping Citigroup’s research unit intact. Thanks for the help boys.


Obama went on to say that “somebody else made that happen.” I thought for a minute he was referring to my almighty God. Then I thought again. By somebody, he meant government.


Sadly, the same goes for how Obama, Bernanke, and Geithner think about the US stock market. They fundamentally believe that by not intervening, our markets won’t work. That’s not the America I came to in the early 1990s. That’s just sad. This is a No volume; No Trust market – if you’ve got a confidence and hiring problem Mr. President, you built this.


Back to the Global Macro Grind


Now that I got that off my chest, onto the American Made Central Planning Hope of The Day – Ben Bernanke’s testimony at 10AM EST in front of our clueless economic overlords in the Senate.


This is actually getting as funny as it is pathetic. Ahead of whatever sweet-nothing Bernanke will whisper about Qe4 today, markets are front-running him again. This has been happening all year. Each rally is shorter in duration, and to lower-highs in elevation.


Commodity markets in particular are straight up into the right. If you are into the Down Dollar Drugs (USD was up yesterday until that bomb of a June US Retail Sales print of -0.5%), that’s where you get your short-term fix. That’s where the boys who jacked 1.05 million commodities options contracts (CFTC data) right back up to their early April highs are looking for some pop.


“Pop, pop, bang!” (Jimmy Braddock’s punching combo in Cinderella Man).


Unfortunately, that’s how it all ends. They’ll get their pop, then its lights out for whatever is left of US Growth. With US GDP Growth this slow, everything on the margin really counts – and the last thing the US (and global) economy needed was a +17% rip in the price of oil since late June on Bernanke Begging.


That’s why we are starting to see the market leaders of both the US economy and US stock market (Technology and Consumer Discretionary) start to lag. While they loved the tax cut of $89 Brent oil in mid-June, they do not appreciate $104/barrel staring them in the face this morning.


With the SP500 down for 7 of the last 8 trading days, this is how the S&P Sector ETF laggards look like for July and Q3 to-date:

  1. Consumer Discretionary (XLY) = -1.01%
  2. Technology (XLK) = -1.69%
  3. Industrials (XLI) = -2.92%

Now if I have been anything since March 12th when we shorted Industrials (XLI) on the #GrowthSlowing call, I have been consistent. My team’s research has also been very consistent on what infects real (inflation adjusted) US Consumption Growth too – the marginal price inflation of food and energy.


Since 71% of the US Economy = Consumption, this is one of the main things you need to get right if you want to get the slope of growth in the US economy right. That’s precisely why the politicians of the 112th Congress have had their policy to inflate food/energy prices all wrong.


Post 2006, Bush had this as wrong as Obama has it now. Don’t forget that both Presidents empowered Bernanke. For Bush, that was then. For Obama, we live in the now. And not letting free-market prices clear for the sake of a broken belief system that central planners can “smooth” economic cycles and suspend economic gravity is now his problem.


Your conflicted and compromised cronies built this environment for small business owners and market participants in America. My team and I have been building our business in spite of you.


My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar Index, EUR/USD, Spain’s IBEX, and the SP500 are now $1559-1598, $100.25-104.02, $82.47-84.03, $1.20-1.23, 6408-6767, and 1339-1365, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


You Built This - Chart of the Day


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The Macau Metro Monitor, July 31, 2012




The 3% average yearly growth rate cap to be introduced for 2013 for live gaming tables will be liberally applied to ensure it doesn’t impact the development of the gaming industry.  This was already the understanding among industry insiders, but the Office of the Secretary for Economy and Finance has now confirmed it to Portuguese-language newspaper Ponto Final.


This means that the incremental cap is set to be liberally applied such that new tables will be allotted from the total number that will accrue by 2023 – around 1,650 new tables, according to Ponto Final – rather than be squeezed into the market through marginal annual increases that could hold back the opening of new casinos.


June could pull GGR growth into negative territory on the year



Based on taxi data and McCarran Airport figures, we project that June Strip gross gaming revenues (GGR) fell 6-10% YoY, assuming normal slot and table hold percentages.  Baccarat is always the wild card - both hold and volume - but if the Strip falls in our predicted range, June will drive YTD gaming revenue down versus the first half of 2011.  Remember that May was disastrous with GGR falling 18%.  It has become clear that Vegas is not only in the middle of a modest recovery, the recovery cannot even be called modest and may not even be a recovery.


WYNN and LVS already reported a 33% and 8% drop in GGR, respectively, on the Strip in Q2 2012.  Despite their awful revenue performance, we believe WYNN and LVS actually gained volume market share YoY, which means the two gaming operators yet to report earnings - MGM and CZR - probably performed poorly as well. 


The number of enplaned/deplaned airport passengers at McCarran fell by 0.1% YoY, the 1st decrease since December 2010.  McCarran's expansion into Terminal 3 is ongoing and may help with the ease of transportation and additional capacity.  Taxi trips increased 2.2% YoY in June.  


June results will also be hurt by lower than normal slot hold due to an accounting rule which defers slot win on the last day to July, since June ends on a Saturday.  Moreover, June 2012 faces slightly higher than normal table and slot hold percentages generated in June of 2011.


Here are our projections:



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