Takeaway: The market is doing precisely what it should here – confuse people.
This note was originally published November 02, 2012 at 12:54 in Macro
POSITIONS: Long Utilities (XLU), Short Industrials (XLI)
The market is doing precisely what it should here – confuse people.
Don’t forget that the market has really only had 1 up day in the last 8, so there’s still plenty of anxiety post The Bernanke Top (SEP14) and a ratty October (Tech -6.3%). We’ve recaptured the TREND (1419) line, but failed at the TRADE (1432) line – so there’s plenty of risk to consider into the Election.
Across our core risk management durations, here are the lines that matter to me most:
- Immediate-term TRADE resistance = 1432
- Intermediate-term TREND support = 1419
- Immediate-term TRADE support = 1392
In other words, the immediate-term Risk Range is now 1392-1432 (a little tighter day over day, which is bullish) and the trigger line for beta remains 1419.
Strong Dollar (down Gold, Commodity Bubbles, etc.) continues to price in that the media’s political “experts” (polls) may have the Election wrong. Only time will tell. In the meantime, we’ll let the market tell us what to do next.
Keith R. McCullough
Chief Executive Officer
Takeaway: The COO/CFO resignation stinks big time. We did not trust the company's accounting in the first place. Now 30-40% downside is in play.
We’re shorting $GES on today’s intra-day bounce. Quite frankly, with the news that the COO and CFO both resigned we presumed that the stock would get shellacked. This is a company where we’ve never been completely comfortable with its accounting, and in justifying margin levels – even after a 600bp slide to 11% -- in its Europe and Licensing businesses. Michael Prince joined from Nike (Converse) to be COO in November 2010, and CFO Dennis Secor has been with the company through most of the Carlos Alberini days (when the company’s reported numbers were actually headed in the right direction). Having Paul Marciano more directly involved in running this business is not a comforting event as it relates to creating shareholder value.
Yeah yeah…GES looks cheap at 10x next year’s consensus. But (we’ve been saying this a lot lately) valuation is not a catalyst. Margins are now at 11%, and we have more confidence that they see 6% before they see 13% without sacrificing meaningful top line growth. If this name sees 8% margins, we’re looking at about $1.65 in earnings on a negative growth rate (obviously a multiple killer). Give that an 8-10x multiple and you’re looking at a 14-17 stock. That’s 30-40% downside from here.
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Takeaway: A demographically-based breakout of the US labor market paints a mixed message for Obama’s odds of reelection.
- Taking a careful and consistent eye to the OCT Jobs Report, we are of the view that the underlying trends in domestic labor market conditions sequentially improved in OCT.
- From a headline perspective, these improvements bode well for President Obama’s reelection chances in pre-election polls. From a analytical perspective, however, there’s little to be gleaned from the OCT Jobs Report as it relates to the actual election next week. Still, the data did improve and is in-line with the general string of sequentially less-bad economic data (particularly on the PMI front) emanating from Europe, Asia and Latin America in the month of OCT.
- Judging by deltas in unemployment across core demographics from the start of his presidency, President Obama may find it very difficult to galvanize his voter base in order to get them to support him at the polling booth(s) with the same fervor and magnitude as they did four years ago. That said, however, he just might be able to overcome this non-consensus view that he won’t have nearly as much support in 2012 as he experienced in 2008 from a voter turnout perspective – especially if he is able to adequately assign all of the blame for various post-crisis peaks in unemployment to George W. Bush and all of the credit for the trend of multi-year improvement to himself.
- As it relates to what to do next from an investment perspective – irrespective of which candidate and Party controls the White House and Congress – please refer to our OCT 18 note titled: “COULD THE ELECTION, THE FISCAL CLIFF AND THE DEBT CEILING ALL BE BULLISH CATALYSTS FOR THE MARKET?” for more details.
With the general election only a few days away, it’s natural to analyze today’s Jobs Report with a political lens. In reality, however, we learned from our 10/24 conference call with Professor Ken Bickers of the University of Colorado, most voters tend to make up their minds on the economy well before the final hours of campaigning (likely in the late summer/early fall periods).
Bickers, whose model has accurately forecasted each Presidential election outcome going back to 1980, suggests Romney is likely to win the US Presidency with a demonstrable margin from an electoral college perspective. We’ve posted a link to the presentation below if you have yet to view it:
All that being said however, we are increasingly of the view that domestic economic data warrants unprecedented scrutiny, as headline figures for jobs and GDP have arguably become far more subject to government assumptions about seasonal adjustment effects, the rate(s) of inflation, etc. than in years past. Even taking a careful and consistent eye to the OCT Jobs Report, however, we are of the view that the underlying trends in domestic labor market conditions sequentially improved in OCT:
- Subtracting out the now-infamous Birth-Death Adjustment from the NSA employment data, MoM Non-Farm Payrolls growth accelerated to +42k YoY form -67k in SEP;
- Adjusting the unemployed headcount for a 10yr average Labor Force Participation Rate, the Unemployment Rate SA improved to 10.5% in OCT from 10.8% in SEP; and
- Adjusting the unemployed headcount for the JAN ’09 Labor Force Participation Rate (Obama’s “starting position”), the Unemployment Rate SA improved to 10.9% from 11.1% in SEP. On this score, Obama has seen a +310bps rise in the seasonally-adjusted Unemployment Rate since he’s taken office.
From a headline perspective, these improvements bode well for President Obama’s reelection chances in pre-election polls. From a analytical perspective, however, there’s little to be gleaned from the OCT Jobs Report as it relates to the actual election next week. Still, the data did improve and is in-line with the general string of sequentially less-bad economic data (particularly on the PMI front) emanating from Europe, Asia and Latin America in the month of OCT.
HOW DOES OBAMA’S BASE FEEL ABOUT FOUR MORE YEARS?
Accepting the following headline figures at face value, we highlight a few critical deltas in President Obama’s key demographics ahead of Tuesday’s election:
- The seasonally-adjusted unemployment rate among 18-19 year-olds has backed up +280bps since JAN ‘09 to 22.7%, though demonstrably improved from the 25.5% post-crisis peak recorded in MAY ’10;
- The seasonally-adjusted unemployment rate among 20-24 year-olds has backed up +80bps since JAN ’09 to 13.2%, though demonstrably improved from the 17.1% post-crisis peak recorded in APR ’10;
- The seasonally-adjusted unemployment rate among women has backed up +70bps since JAN ’09 to 7.7%, though demonstrably improved from the post-crisis peak of 9% recorded in NOV ’10;
- The seasonally-adjusted unemployment rate among African-Americans has backed up +160bps since JAN ’09 to 14.3%, though demonstrably improved from the post-crisis peak of 16.7% recorded in AUG ’11; and
- The seasonally-adjusted unemployment rate among Latinos is at 10% – the same level seen in JAN ’09 – though demonstrably improved from the post-crisis peak of 13.1% recorded in NOV ‘10.
Judging by the aforementioned deltas from the start of his presidency, President Obama may find it very difficult to galvanize his voter base in order to get them to support him at the polling booth(s) with the same fervor and magnitude as they did four years ago. That said, however, he just might be able to overcome this non-consensus view that he won’t have nearly as much support in 2012 as he experienced in 2008 from a voter turnout perspective – especially if he is able to adequately assign all of the blame for those post-crisis peaks to George W. Bush and all of the credit for the trend of multi-year improvement to himself.
This we know: Barack Obama is a great politician; the best bet is that he has been able to do so through careful messaging and populist politicking. As such, one can reasonably infer that his base will actually be energized enough to cut into what a minority in the analytical community believe is likely to be a clear advantage for the Republican Party with regards to Tuesday’s voter turnout. That could spell disaster for Mitt Romney’s chances of securing victory, as he likely needs Democrat voter participation to decline demonstrably from 2008 levels to have a reasonable expectation of victory.
As it relates to what to do next from an investment perspective – irrespective of which candidate and Party controls the White House and Congress – please refer to our OCT 18 note titled: “COULD THE ELECTION, THE FISCAL CLIFF AND THE DEBT CEILING ALL BE BULLISH CATALYSTS FOR THE MARKET?” for more details.
Have a great weekend and best of luck to our clients on the East Coast with their respective recovery efforts in the aftermath of Hurricane Sandy.
The shorts were right about Singapore but low hold is not good enough in the face of accelerating market trends, growing share in Macau and a more shareholder friendly capital deployment strategy.
It was pretty well understood that Singapore would miss consensus expectations. While the magnitude of the miss was huge, it was mostly due to a very low hold percentage. We think the good clearly outweighs the bad here for LVS. Macau had a great Q3 and more importantly, market growth is accelerating. Moreover, LVS’s market share is growing and we think that trend will continue consistently over the next year, similar to the ramp up of Galaxy Macau. +20% market share in October was better than recent expectations and LVS may just be scratching the surface on share gains. Is 22-24% share out of the question? We don’t think so. LVS’s announcement of a 40% increase in the dividend was a nice positive and we are encouraged with management’s enthusiasm for further dividend increases. We think LVS will begin to attract a whole new investor base without losing interest from growth-oriented funds. It’s not often you find a growth stock (wait until new international markets begin to open – South Korea?) with the kind of cash flow profile of LVS. Strong cash flow, a willingness on the part of management to return that cash to shareholders and a potentially huge pipeline of high returning projects is a powerful combination.
Macau revenue and EBITDA came in 1% above the Street, but 4% below our EBITDA estimate. We believe that most of the discrepancy vs. our numbers is attributable to unfavorable mix at FS & Sands Macau, along with weaker overall results at SCC, offset by slightly better results at Venetian. Based on our calculations, hold had minimal impact on EBITDA this quarter—a $3.5MM benefit. Sands China held at 2.81% across the portfolio. Direct play was 17%.
- After poor results in 2Q, Venetian bounced back this quarter, reporting EBITDA 8% above consensus and 1% above our projection
- We estimate that high hold benefited the quarter by $28MM on net revenue and $16MM on EBITDA
- Venetian historical hold rate since opening has been 2.93% vs. 3.32% in 3Q.
- Direct play increased to 30% of total RC drop
- Rebates were 32.2% of win or 107bps
- Variable expenses of $355MM
- $308MM of gaming taxes
- $27MM of estimated junket commissions
- Estimated fixed expenses of $94MM, up 10% YoY but down $2MM QoQ
- Four Seasons produced a disappointing Q missing our EBITDA estimate and the Street’s by 18%
- We knew that hold would be poor, so what drove the miss?
- Higher rebates/junket commissions
- We suspect that not only was hold poor, but the mix was also unfavorable. Otherwise, costs just went through the roof –which is less likely.
- We estimate that low hold negatively impacted Four Seasons EBITDA by $3MM.
- Four Seasons’s historical hold rate since opening has been 2.74% vs. 2.58% in 2Q.
- Direct play was 16% of total RC drop, consistent with 1H levels
- Rebates were 35.5% of win or 92bps
- Variable expenses of $140MM
- $108MM of gaming taxes
- $25MM of estimated junket commissions
- Estimated fixed expenses of $23MM, up 21% YoY
- Sands came in below our number, despite having better revenues. We suspect that mix may have been unfavorable, or fixed costs were just higher than we expected.
- Hold of 2.96% is just 2bps above Sands’ historical hold rate of 2.94% so any benefit to EBITDA was likely immaterial
- Direct play fell to 8% of total RC drop
- Rebates were 36.1% of win or 107bps
- Variable expenses of $175MM
- $148MM of gaming taxes
- $17MM of estimated junket commissions
- Estimated fixed expenses of $55MM, down 5% YoY but up $8MM QoQ
Sands Cotai Central
- SCC EBITDA was 10% below our estimate and the Street's
- Revenues were $23MM below our estimate
- Net gaming revenues were $17MM below our estimate
- Direct play was lower than we estimated but hold was in-line, causing $6MM less of gross VIP win
- Rebates were also higher than we estimated, accounting for another $5MM of lower results
- 38% or 87bps vs. our estimate of 34% or 79bps
- Mass table revenues were $6MM lower than we estimated due to lower table hold
- Net gaming revenues were $17MM below our estimate
- Net non-gaming revenue was $6MM below our estimate due to lower F&B and other revenues and higher promotional expenses
- We estimate that low hold negatively impacted EBITDA by $9MM
- We used a 2.85% rate to normalize EBITDA
- Direct play of 9% of total RC drop
- Variable expenses of $157MM
- $137MM of gaming taxes
- $14MM of estimated junket commissions
- Estimated fixed expenses of $54MM, just $2MM above 2Q
- While a miss in Singapore was not likely a surprise, a miss of this magnitude definitely led to some jaw drops. Most of the miss vs. the whisper number was hold-related, although trends across the board were disappointing
- 3Q saw continued deceleration from 2Q
- Slot handle was fell 6% YoY – the first YoY decline-- and 4% QoQ. Slot handle has been slowly declining since 3Q11.
- 3Q11 slot handle ($MM): $2,793
- 4Q11 slot handle ($MM): $2,745
- 1Q12 slot handle ($MM): $2,741
- 2Q12 slot handle ($MM): $2,741
- 3Q12 slot handle ($MM): $2,621
- Slot handle was fell 6% YoY – the first YoY decline-- and 4% QoQ. Slot handle has been slowly declining since 3Q11.
- Mass drop decreased 6%- the first YoY decline since opening
- Over the last 6 quarters, mass drop has fluctuated between $1,115MM and $1,206MM (8% range)
- RC volumes declined 29% YoY, marking the 2nd Q in a row of declines
- There were YoY declines in F&B, convention, retail and other revenues
- Since the hotel is already running at full capacity, and rates are already at $360/night, there likely is not much upside from here as far as hotel revenues go. The lack of hotel rooms is a general constraint for growing the Singapore gaming market
- The hold impact of $105MM on EBITDA that LVS indicated in their release was in-line with our calculation
- The rebate increased to 1.26%
- Promotional spending decreased a bit to 21% of non-gaming revenue
- Variable expenses were $104MM
- GST: $31MM
- Gaming tax: $68MM
- We estimate that fixed expenses were $260MM, up 5% YoY
- Vegas net revenue and EBITDA came in 2% and 5% ahead of our estimate. The “strength” in Vegas was entirely driven by some Asian play and high hold.
- Over the past 4 years, average table hold for LVS in LV has been 19%. We estimate that high hold benefited EBITDA in the quarter by $39MM
- The rebate rate was 6.1% (vs. 5.2% last year and 3.8% in 2Q12)
- Promotional expenses were 11.2% of GGR, much lower than last quarter's 17.6%
- Operating expenses, excluding taxes, increased 4% YoY to $252MM
Takeaway: Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.
Employment data released this morning by the Bureau of Labor Statistics suggest near-term strength for Quick Service and Fast Casual trends. Full-service employment growth suggests a possible stabilization in hiring trends. Our view is that casual dining trends decelerated in October versus September. Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries. Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.
Employment by Age
Employment growth among 20-24 YOA cohort, which has been highlighted by many QSR and fast casual management teams as an important source of demand, decelerated to 1.4% year-over-year in October from 3% in September. Employment growth among 55-64 year olds accelerated, sequentially, in October to 5.4% from 3.6% in September. If this acceleration were to continue, it would be a positive signal for casual dining sales.
The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggests that employment growth in the food service industry may have tracked sideways-to-down in September. On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 11k (second chart below). As the first chart of this post illustrates, the trend of employment growth within the Leisure & Hospitality seems to be stabilizing at roughly 2%.
Leisure & Hospitality: Employment growth at +2.54% in October, down 2 bps versus September
Limited Service: Employment growth at 2.7% in September, up 56 bps versus August
Full Service: Employment growth at 4.4% in September, up 22 bps versus August