The Macau Metro Monitor, August 28, 2012




Macau’s casinos don’t have enough manpower and the situation will only get worse next year, as the government increases the cap on the number of live gaming tables, warns Macau Gaming Industry Employees Association, João Bosco Cheang Hong Lok.  “Next year, the number of gaming tables will increase by 3%. I believe many casinos will increase the number of their gaming tables and by then, staff shortages in the gaming industry will be even tighter,” Cheang said.  Cheang also noted that starting November 1, all those below 21 years of age would be banned from working inside the city’s casinos.



The number of imported workers in Macau reached a new all-time high in July.  According to official data from the police released yesterday, Macau had a total of 104,938 imported workers by July-end, 60% of whom came from the mainland.  That is above the previous peak, recorded in September 2008, when Macau’s imported labour workforce reached a total of 104,281 people.  Hotels and restaurants are the number one employer for imported workers, giving work to 30% of the total.



RL: The Flip Side of the CFO Announcement

Takeaway: There's a flip side to the chest-beating that the $RL bulls will all come out with regarding the CFO announcement.

This RL announcement of Chris Peterson as CFO is net positive. The guy is from P&G, and formerly the head of its largest division. He’s going from presiding over a $45bn business to a roughly $10bn biz (wholesale equivalent). You can bet that every sell side analyst out there will come out this morning beating their chest defending how great this is. The reality is that they're probably right... it is.


Roger Farrah runs an extraordinarily tight ship, and winning the top finance/ops job over a pool of thousands of prospects is a feat in itself. Moreover, the role of CFO has historically been somewhat weak at RL, but we can’t imagine that Mr. Peterson would leave his post at PG for a diminished role in a company 1/5 the size of his current business.


There is one negative consideration, however…Executives from Packaged Goods companies don’t exactly have the best track record in coming into fashion businesses and knocking the cover off the ball. It’s a fundamentally different business. When a CPG company beats/misses, it’s usually by 2-3% top line, and 6-8% EBIT. But in a discretionary fashion business with an outsourced production model, we’re talking 5-10% rev variations and 20-30% EBIT swings. Capital allocation is radically different, and takes place more heavily on the P&L (and off balance sheet) than it does in PP&E and in vertical sourcing ops.  Here’s a few examples of executives that were lauded as being exceptional ‘breaths of fresh air’ but turned out to be disasterous.

  1. Paul Charron: Everyone loved the guy (Campell Soup), but in reality he destroyed LIZ.
  2. Bill McComb: Cleaned up Charron’s mess, though admittedly got into a tougher bind than he expected coming from JNJ.
  3. Bill Perez: When he fell into the fountain at Nike’s campus on his first day, he should have known his days were numbered. Going from SC Johnson to Nike is not easy. Sometimes you need to go with a gut feel in pricing a pair of shoes at $300 regardless of what the data says. Bill could not understand this.
  4. Bob Eckert: From Kraft to Mattel. He’ll be the first to admit how fundamentally different the two businesses are and how much it hurts to not be on trend for an extended time period of time (Barbie v Bratz).
  5. Paul Pressler: From Disney and Avon to Gap…he couldn’t cut the mustard. Ousted after two bad holiday seasons.
  6. Glenn Murphy: From Shoppers Drug Mart to Gap. Lately credited with the stock’s rebound. But financial engineering has been the main driver, until JCP ceded share six months ago at a time when, by chance, GPS got colors right.
  7. Ron Johnson: JCP from Apple. ‘Nuff said.


Our point is, by no means, that Peterson will follow the footsteps of these gentlemen. Again, this is Roger’s show. But simply that the sell side will grant this guy a free pass. Let’s practice a little more risk management and be prepared for the challenges that lie ahead of him.

Issac on Path to Shock the Consumer

Takeaway: Isaac does not appear to be a comparable scale hurricane to Katrina, but Isaac will likely drive gasoline prices higher in the short term.

If there is one thing we have noticed about tropical storms and hurricanes, it is that when they are built up aggressively by the main stream media they typically disappoint in terms of their scale.  With comparisons to Katrina, tropical storm Isaac may already be in this category of being overhyped.  Nonetheless, Isaac is on his way and will, at the very least, disrupt oil and natural gas production in the Gulf of Mexico for a period of time.


According to the National Hurricane Center (NHC), Isaac is very likely to evolve from a tropical storm into a hurricane over the warm waters of the Gulf of Mexico.  The current projection from the NHC is that Isaac will be a Category 1 hurricane, based on the Saffir-Simpson scale of hurricane activity, with winds between 74 and 95 miles per hour.  Katrina was a Cat 5 storm with winds above 157 miles per hour.  The unseasonably warm temperature in the Gulf of Mexico is the wild card that could strengthen Isaac beyond Cat 1.


The computer models being run by the NHC, as outlined in the map below, show Isaac making landfall by late tomorrow evening or early Wednesday morning.   By midday Wednesday, the storm will be fully landed.  The likely landing location is the 300-mile stretch from the bayous of southwest New Orleans to the edge of the Florida panhandle.


Issac on Path to Shock the Consumer - 1


Even if Isaac does take land as a more moderate storm, it appears to have a similar trajectory as Katrina and may well be on track for New Orleans by late Tuesday or early Wednesday based on its projected speed of 14 miles per hour.  A key risk being touted by the NHC is that Isaac may make landfall coincident with high tide, which would lead to excessive flooding.


The larger risk, especially for an increasingly tepid consumer, is the impact of the storm on energy prices over the next couple of months.  As it relates to exposure from Isaac:

  • The Gulf Coast is home to 23% of U.S. oil production and 44% of refining capacity;
  • In total, more than 346 oil platforms (58% of the total) and 41 rigs (54% of total) have already been evacuated;
  • Currently, 1.0MM barrels per day is shut in (78% of GOM oil production) and 48% of gulf natural gas production ; and
  • Based on Hedgeye’s count, more than 1.1 million barrels of refining capacity will be taken offline in Lousiana, including a 490,000 barrel facility in Garyville, Lousville.

On the positive side of the equation, most refiners are built to withstand up to Cat 2 hurricanes.  Therefore, unless Isaac accelerates beyond its current Cat 1 projection, long term damage to refiners or oil production facilities is unlikely.


In the chart below, from Forbes, we show the active oil platforms in the Gulf of Mexico.  Based on Isaac’s current path, the storm will travel directly through the heart of the oil producing region of the GOM.


Issac on Path to Shock the Consumer - 2


In the last chart we highlight the spiking of gasoline prices that occurred in conjunction with Katrina.   Gasoline prices spiked almost 50% and remained elevated for a couple of months.  With national gasoline prices, according to the most recent data from the Energy Information Administration, at $3.72 per gallon, a price shock from this level would be catastrophic for the U.S. consumer.  Undoubtedly, it would also create a very negative situation for the President Obama heading into the November election.


Issac on Path to Shock the Consumer - 3


So, even if Isaac is being overhyped, the storm’s path and intensity over the next two days will be critical in assessing whether there will be long term damage and subsequently elevated energy prices in the coming months. 



Daryl G. Jones

Director of Research





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Takeaway: A cheap stock with a number of catalysts

Keith bought LVS in the virtual portfolio at $42.05.  



LVS TRADE range:  $41.99-44.47.  TREND support:  $39.69

LVS is way down off of its $60+ high reached in April of this year owing to a halt in VIP growth in Macau, a rough start from Sands Cotai Central (SCC), and slowing growth in Singapore.  With the stock down 30%, we believe concerns have been adequately discounted in the stock.  However, there are signs that VIP is picking back up in Macau and the SCC performance has improved.  Singapore expectations have moderated to only slight EBITDA growth for 2013 which might actually be too low.


The stock trades at 11x 2013 EV/EBITDA, close to a historical low.  Meanwhile, there are a number of positive upcoming catalysts.  The opening of 2,500 Sheraton rooms at SCC should provide a big boost.  Sheraton is probaby the top hotel brand in China and combined with the associated marketing and potential infusion of junket liquidity, should provide more market share juice for LVS as well as grow the market.  Additionally, with its significant free cash flow - enough to easily fund another Cotai project - and low overall leverage, we think LVS could announce a stock buyback.  For the market, look for continued sequential improvement in YoY growth off of the July low.





Takeaway: Mass is on a roll and higher hold is the new normal.

Mass gaming revenue has been on a tear yet visitation growth has been fairly modest.  What’s going on?  Aside from misleading visitation data which we will get to, the Macau Mass tables have been holding at an increasingly higher rate.  As the following chart shows, average Mass hold percentage grew from around 18% in 2Q07 to over 27% in Q2 2012 – and it’s not luck.




So what’s driving hold percentage higher?  The consistency of the up move suggests luck is not a factor.  We believe players are playing longer (more hands) and bringing more cash with them.  Our experience in Las Vegas is that hold moves higher in good economic times and down in bad.  Unlike the VIP business where hold is measured as a % of roll, there is no way to measure roll in the Mass sector so the denominator in the hold calculation is simply cash converted to chips.  So hold will theoretically climb if velocity of play goes up.  On the other hand, if players are cautious they may still take out the same amount of chips but spend less time gambling.  Thus, the denominator would be the same but the player would lose less.


There are likely other factors at work driving Mass hold higher.  Refined rewards programs and customer database marketing have been providing more and better incentives for longer play.  A better mix of higher end players also helps.  We’ve seen this occur in other more mature markets as well. 


Higher hold is not the only driver.  As seen in the above chart, estimate Mass volume has been growing nicely, albeit below the rate of revenue growth.  Yet visitation growth remains modest as shown below:




So what’s causing this phenomenon?

  • Higher Mass hold percentage discussed above
  • Hotels running at high capacity on the weekends so lower-end Mass getting shut out
  • Better yield management from the casinos so lower-rated players getting less
  • Higher table minimums – both City of Dreams and Galaxy Macau have successfully pursued this strategy to focus on the Premium Mass business
  • More of a Mass to VIP mix in the hotels – again a yield management strategy which improves margins
  • Visitation data is not perfect – we’ve heard that the Macau government has cut down on its citizens crossing the borders for short visits to buy cheaper goods.  Visitation data reflects re-entry back into Macau.  Also potentially impacting visitation is fewer visas available for tour groups that are primarily non-gaming visitors.
  • Visitation from outer provinces is growing but lower-end players in the close-in provinces are getting shut out due to yield management

Now What? SP500 Levels, Refreshed

Takeaway: Now What? Sometimes the answer to that question is another series of questions.

POSITIONS: none in Sector or US Equity Index ETFs


Now What? Sometimes the answer to that question is another series of questions.


Will we continue to make lower-highs? What if we make a higher-high on no-volume? What if Bernanke drives for Oil $150 and a Weimar #GrowthSlowing redo?


I don’t know. From a US Equity beta risk management perspective, all I can tell you is where I buy/cover and where I sell/short.


Across the core durations in our model, here are the lines that matter to me most: 

  1. Immediate-term TRADE overbought = 1419
  2. Immediate-term TRADE oversold = 1402
  3. Intermediate-term TREND support = 1389 

Simplicity born out of complexity.


The Fed, ECB, and their Bailout Beggars would have to embrace uncertainty before accepting how chaos theory drives our real-time decision making.




Keith R. McCullough
Chief Executive Officer


Now What? SP500 Levels, Refreshed - SPX

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