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Euro PMIs: Just Plain Bad

Takeaway: PMIs remain bombed out alongside weak fundamentals. Eurocrats continue to butt heads and markets gyrate on rumors.

Positions in Europe: Long German Bonds (BUNL)

European Manufacturing and Services PMIs for September (released on Monday and today, respectively) have shown little to no improvement over the last 7-8 straight months, stuck below the 50 line indicating contraction (see charts below).


Euro PMIs: Just Plain Bad - bb. pmis table


Euro PMIs: Just Plain Bad - bb. pmis chart


This comes as no great surprise given the larger Eurozone forces of slowing growth alongside fiscal consolidation and political consternation from Eurocrats on collective policy. To the latter point, we believe the runway to get to a fiscal union (including a banking union) is much longer than current expectations project. We see both the push back from stronger nations like Germany to “blindly” accept this risk (ie without conditions to benefit itself and/or limit reduction in its credit rating) and coordination to set up the logistics of a fiscal union inducing a protracted drag in this decision. 


To the point on timing, ECB Executive Board member Joerg Asmussen said on Monday that the ECB will not rush through “half-baked” plans for a new pan-European supervisor.


Remember that German Chancellor Merkel and Bundesbank President Jens Weidmann continue to butt heads on many fiscal issues. Eurobonds is one topic that Weidmann remains vehemently against while Merkel has not ruled out their use. However, if the Eurozone is to move to a fiscal union, Eurobonds are simply a natural extension of a fiscally united union. This is one hot topic to monitor as we move through the calendar year.


Interestingly, yesterday, Jin Liqun, chairman of the supervisory board of the China Investment Corporation (China’s $480B sovereign wealth fund), said that CIC will not buy bonds issued by debt-ridden Eurozone countries until their fundamental problems are solved. This point is of note because some over the last 12 months have suggested there’s a reduction in “risk” across Europe given the willingness of the Chinese to step in and support the region. Further, Jin said:


“The mass demonstrations in Greece and in Spain against fiscal tightening do not bode well for attracting investment into their debt… It's not realistic to expect any Chinese investor, CIC included, to buy the bonds, which are not safe…If the euro zone would issue a Eurobond backed by all of the countries - it is more attractive to international investors. Backed by all of the countries means backed by the core members."

We currently have a Real-time position in German Bonds via the etf BUNL.  Keith covered our Real-time position in FXE (EUR/USD) on 10/1 at $128.53 with the cross at our immediate term TRADE oversold level. The EUR/USD continues to fail at its $1.31 TAIL line of resistance.


Euro PMIs: Just Plain Bad - bb. eur usd



Matthew Hedrick

Senior Analyst


Product looks good



Product highlights

  • They are recognizing the slots to Cleveland in the September quarter
  • Participation:  NASCAR (June 13'), HOT Shot Dual Reel (May/June release), Pawn Stars (Jan/ Feb Release), Tiki Magic (May 13')
  • For sale:  Connect Four, Sumo Kitty, Shadow Diamond and Quick Hit
  • Innovation Area:
    • Curved V32 looks really interesting - certainly something that no one has
    • Finding more apps for the i-Deck (U-Drive and U-Wack)
    • Exploring ways to have play on mobile devices within casino properties in Nevada
    • Looking at cashless wagering
    • Trying to monetize participation revenues on side betting games on DM
    • Looking at cross-channel social wagering on slot devices
    • Game appearance customization
    • Augmented reality
  • Systems:
    • Elite bonusing suite:  Virtual racing and NASCAR/DM Tournaments
    • Opportunity to market to players at the point of play and offering customers that lose "flex rewards"
    • Tournaments driving foot traffic and play levels at casinos
  • Service tracking manager:
    • Allows them to settle jackpot much faster than manual method.  Scans government ID and populates the data in system automatically. Decreases down time of device.
    • Allows them to see if there are HOT players, problem devices, service requests
  • Business intelligence: 
    • Allows them to analyze how they are doing regarding plan.  Visualization down to the floor and shows where their patrons are coming from.  This is where they collect all the rich data.  All of these tools can be expanded to mobile.  These tools decrease costs of FTEs and increase customer satisfaction.



Here are notes from meetings with some slot managers at G2E



Slot manager #1

  • They have 4 Michael Jacksons - doing great $1,100/day after fees.  Hearing that Grease is a hit or miss.
  • Liked ALL's stuff and good participation product but they are actively looking to reduce what they spend on participation.  Capping their payouts.  They are actively looking to reduce their IGT WAP footprint. 
  • Likes BYI's stuff.  Likes NASCAR a lot.  DM is good but expensive.
  • WMS reduced their fees to keep share but he doesn't think that they can support their existing footprint


Slot manager #2

  • Liked Pawn Stars (BYI)
  • 5-8% of his floor is participation  
  • Thought NASCAR was boring
  • Liked Speilo's Zombie game, Superman game (ALL), Buffalo and Wonder4 (ALL) especially for high limit
  • ALL had best showing in a while
  • Liked the V32 content for BYI
  • WMS's stuff last year was just terrible.  Colossal reels are doing well though.  They converted all their stuff to colossal reels.  He ordered 12 games but then didn't need them but WMS has been harassing them to buy them. Seems desperate.
  • In LV, everyone is waiting to see what happens.  August was a really bad month on the strip for occupancy and slot revs.  Sept was bad too.
  • Comp set is all down YoY for Revpar these last few months.  Just less people coming.  Occupancy was hit more than rate.  Rate down a few dollars.  Demand into NYE's doesn't look good either.
  • Was hearing for a while that LV Hilton would close but now it may stay afloat for a while
  • Tropicana was doing really bad.  Mid-week coin-in is in the $200,000 range.  Not doing any better post-renovation.
  • Cosmo sucking wind
  • IGT stuff that he's purchased has worked.  Likes the joystick games, Dolly Parton, and Family Guy.  IGT's Hot Roll is doing great.
  • BYI's V22's don't really do well on his floor
  • If he had his budget back, he would buy all IGT.  Konami games have recently fallen off in performance
  • Grease isn't doing great but Michael Jackson is doing really well even in a bad location
  • WMS: Clue was terrible as was Price is Right
  • IGT proposed getting an online site for them - for free - in exchange for an 80/20 when online becomes legal
  • No correlation between people who play electronic table games and live games
  • They set their hold to the max on all new games.  Most of their clients don't have a clue.
  • Doesn't see a lot of downside in slots - bottom out in 6-12 months and will likely just sit there
  • LVS's floor is all participation - at least 25% or so.  They have an option to buy out the games after a while.
  • BYI runs their system.  It was installed in 2008. 

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Takeaway: We like the IGT, WMS, and BYI coming out of G2E. Fundamentals for the US operators look softer.

Suppliers look good, operators, uh, not so much 



Key Supplier Takeaways from G2E 

  • Overall, we thought G2E was a very good show for the suppliers.
  • WMS surprised on the upside in terms of content this year.  WMS will appeal to investors looking for a turnaround on a beaten down stock and there was certainly a buzz in the investment community out at the show.  The excitement probably means WMS works for a long trade.  However, we would caution that the appearance of good content doesn’t always translate into high revenue generating games.  Even if the content performs, it will be at least a couple of quarters before the revenue impact is meaningful.  WMS’s near-term earnings visibility is cloudy.  Nevertheless, the stock will likely run over the next week or two.
  • BYI displayed very good content and they are outperforming with their existing content.  While Grease has peaked, Michael Jackson is doing extremely well and NASCAR was well received by slot managers at the G2E.  Market share will likely continue to rise and BYI is certainly a better earnings story than WMS.  On the margin, BYI right now is the supplier to beat.
  • IGT had some good content and the earnings outlook is strong.  We still expect 20%+ EPS growth for next year.  Our biggest concern remains “brain drain” and we heard more of that from our private industry contacts.  Having said that, it will take a year before that impacts content, in our opinion, and in the meantime, investors should feel good about earnings visibility.  Management certainly seems bullish.

MGM and Las Vegas

  • As we mentioned last week, MGM management seemed less optimistic that the Q3 RevPAR decline was a one shot deal.  Overall softness has carried over from the Summer into the Fall.  We spoke to folks at other properties and other market participants and we believe the Strip numbers were not good for either August and September.  We already published a negative YoY projection for August Strip revenues and that seemed confirmed with our contacts out in Las Vegas.  Furthermore, October numbers may look ugly with one less Saturday and Sunday compared with October 2011.
  • MGM focused on the positive in their presentation which was convention bookings for 2013.  While certainly a positive, convention rooms generate only 13% of total room nights and those folks don’t gamble as much.  We think slot volume growth is the most important metric and it has turned consistently negative YoY.

Regional Gaming

  • PNK seemed bullish but aside from that Louisiana focused operator, we heard little positive commentary from the regional operators.
  • Despite a favorable calendar, September may look weak.  Indeed, Missouri same-store gaming revenues were likely down 5% (we get these numbers early).  Operators probably needed a decent September to make Street revenue projections.  That likely won’t happen and estimates may be going down ahead of earnings.

OIL: Bring The Bears Out

Takeaway: Get the dollar right and you'll get a lot of other things right. A move to the upside will take oil lower.

A move to the upside on the US dollar is all it would take to take oil even lower and Mitt Romney certainly has the ability to do just that at tonight’s debate. Looking at this chart showing one-month performance of Brent Crude oil and the US dollar, you can easily see why we remain bearish on crude. 


OIL: Bring The Bears Out  - image001

CRI: Getting Easier to Short

Takeaway: #1 shareholder selling 40% of their stake is the latest factor on a growing list why CRI is one of our top short ideas headed into year-end.


We don't make investment decisions based on the actions of others, but the major push back we’ve had on taking the short-side of CRI is the ‘Berkshire’s buying’ argument – that just got debunked. Berkshire filed last night revealing they just sold 40% of their stake. Oh, and short interest at 5% of the float now stands at 12-months lows at the same time valuations sit at near seven-year peak levels.

These latest factors add to what is becoming a growing list of reasons why CRI is one of our top short ideas headed into year-end.

Here’s are take on CRI coming out of Q2:

“Strength in Carters' wholesale drove the beat this quarter – and we’ll give them that, but that alone isn’t enough tosupport a stock with such lofty expectations. Importantly, with little delineation and differentiation of product by channel, stronger wholesale performance is actually competing against CRI’s own retail. In fact, this has been reflected by the decline in new store productivity. With Carter’s retail accounting for nearly 2/3 of 2H revenue growth and ~50% of CRI’s top-line in F13, the company is increasingly reliant on increasing the volume of less productive stores. It should come as no surprise then that store growth has continued to increase over each of the past two years at +14% and +17% in F11 and F12 respectively up from +10% in F10. This is simply not sustainable. Assuming CRI maintains this rate of growth, it would hit its ~600 store opportunity threshold by F14 – then what? We think it will have blown up its wholesale business long before then -- there's your risk.

Lastly, the timing of management choosing to go dark on AUR disclosure for “competitive reasons” headed into 2H just smells bad. With product cost pressures now turning to a tailwind down -10% in 2H, the company will have to continue to post solid gross margin results for EPS to meet or exceed current guidance. The opacity in AUR disclosure does little to increase confidence in that regard.

All in, we’re reducing our 2H EPS numbers by $0.05 to $1.45 primarily reflecting higher SG&A spend (e-commerce and marketing) offsetting stronger trends at wholesale. At the time of writing this note, consensus was at $1.84 for 2H and $2.67 in F12 and $3.38 in F13. We’re at $2.40 and $2.95 respectively. If our estimates prove correct, this name has another 25-40% downside from these levels.”


Berkshire reduces holding by ~40% after realizing nearly 120% return since becoming CRI’s top shareholder in October 2010:

CRI: Getting Easier to Short - CRI Berk Stake


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