One derivative of the financial distress in the gaming industry may be the need for capable casino management.  The ownership transfer to the banks and bondholders of distressed assets and companies, in most cases, necessitates a third party to actually run the casinos.  Additionally, with all of the assets potentially up for sale, private equity appears to be circling the wagon and would certainly need capable casino management.  We’ve argued that the survivors will benefit from potentially fewer competitors and certainly lower quality competition as capex budgets have been slashed.  The survivors could also capitalize on a re-emergence of the third party casino management contracts, something not seen on a mass scale since the explosion of Native American Casinos.

Third party casino management is a terrific business.  It requires little upfront cash and is essentially pure profit, thus it is ROIC enhancing.  The management company generates a fee usually based off revenues (stable) and operating profit (incentive based).   In the charts below, we’ve highlighted some examples of potential contracts using a fee structure of 2% of revenues and 20-25% of EBITDA.  Each example is based on an average type property in the market indicated.  Obviously, the numbers could be much higher.  For instance, Bellagio should generate around $1.1 billion and almost $300 million in revenues and EBITDA, which would produce a management fee of $80 million, under our assumptions.




Private Equity has likely been in touch with some operators already.  The relationship with Private Equity would probably include an equity contribution by the manager to secure the contract.  Given the numerous distressed gaming assets, lenders are probably reaching out to capable operators as well.  The potential operators could include some of the better regional operators such as ASCA, BYD, PNK, and PENN.  These companies generate between $200 (PNK) and $625 million (PENN) in EBITDA annually so clearly, management contracts would be material.  Note also that the examples given are for individual properties.  It is also possible that the operators could procure multiple management contracts, i.e. running the OpCo properties for Station Casinos.

The regional stocks have had huge runs off the bottom in the last few weeks.  Valuations appear reasonable for these mature companies.  However, a new growth vehicle such as casino management could justify higher valuations.

Goldman's Got Friends

"I've got friends, of course, but my business has always been the same - a one-man affair.  That is why I have always played a lone hand."
-Jesse Livermore, Reminiscences of a Stock Operator
Next time Goldman's CEO, Lloyd Blankfein, does a touchy feely exclusive interview with National Public Radio (NPR), make sure you cover your shorts. Thank God I did (see my 4/7 note titled "GS: Some Love For Lloyd" at As soon as this man knew his numbers, he got out of the GS dungeon and started giving the Street the looksy that he and his fellow traders had slayed the dragon.
No, Goldman's blockbuster quarter was not a surprise last night. No these guys don't want the TARP moneys anymore. From Washington to Wall Street, these guys have proven that they've "got friends" where they need them, and they continue to "play a lone hand."
Make no mistake here, Goldman's gusher didn't have anything to do with their Investment Banking or Asset Management Businesses. It had everything to do with what their clients can't touch - Trading and Prop. While most of the manic  media is too googly eyed to understand what just happened here, the guys and gals on the Goldman prop desks have to be snickering. Tapping the US government (or their ex-CEO, depending on how you look at it) for a lifeline, then running the tables with tax payer moneys has its privileges!
Guess what's next? Now we'll hear the cries of the wolves that all they really want to do is pay the moneys back...  If you don't know that this has always been their plan, you need to seriously wake up and smell the coffee here this morning - the plan has always been to start paying themselves again. My sincere congratulations to Goldman Sachs for taking advantage of some of the dumbest people the financial media and US government has ever empowered with responsibility.
Now that Goldman has set the bar way too high for virtually everyone else who HAD a prop desk, the risk embedded in the US market's expectations starts to go up. Don't forget how beared-up most of these other wanna be global macro bankers were who are still running TARP Moneys Inc - most of them (with a notable mention to Morgan Stanley) have been explicitly bearish on the prospects for a stock market recovery and my accountability checkpoint has the SP500 up +26.9% from that consensus Depressionista low.
While the bankers were all whining, "traders" as the ever so savant'esque "investors for the long run" call them, were winning. We've just had the largest short squeeze in the history of US stock market trading. Largest, that is, for anyone who wasn't trading in the 1800's at least - and last I checked, that included John Mack.
When he worked at Morgan Stanley, some of the senior guys on the trading floors used to call Vikram Pandit "Trader Vic" - they were being facetious. As equally obvious as Blankfein capitalized on the trading environment in the last 3 months, be rest assured that Trader Vic's TARP Moneys Inc desk was on the other side. There is a winner and a loser on every trade. Never forget that.
With their respective stock markets up again overnight, both the Russians and Chinese have to be watching this American circus with at least some level of suspicion. Inclusive of last night's gains, the Shanghai Composite Exchange is +38.9% and the Russian Trading System is +30.1%. Do we think leaders of these two countries are as dumb as some of ours?
I know, I know... calling people dumb (twice) in the same note is really a mean thing to do. Especially in a business whose memory is as good as her last trade. But you know what? At the end of the day, this isn't the government sponsored game of socialism that everyone getting "made whole" wants this to be.
At the end of the day, as Jesse Livermore said, "this game has always been the same"... "it's a one man affair"... and no matter where you go this morning, there it is. Deal with it and your own returns appropriately, using whatever resources that are legal and at your disposal. Goldman did.
The bullish intermediate TREND line in the SP500 remains intact. In a perverse way, as the US Dollar continues to lose integrity, stocks will REFLATE. My next line of resistance is 869. TREND line support is considerable at 821.
Best of luck out there today,

XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done).  The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide.  There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLB - SPDR Materials -As the USD got pounded yesterday, XLB reflated. It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis.  Domestically, materials equities should also benefit as the stimulus plan begins to move into action.

USO - Oil Fund-We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.  

EWC - iShares Canada-We bought Canada on Friday (3/20) into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.   

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.
GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.


LQD  - iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY - iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

EWU - iShares UK - We shorted the UK yesterday (4/08). We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go to attain its 2% inflation target as inflation has slowed considerably. GDP declined 1.5% in Q1, unemployment  is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.

EWL - iShares Switzerland - We shorted Switzerland on 4/07 and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

UUP - U.S. Dollar Index -We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.3294. The USD is down versus the Yen at 99.6900 and down versus the Pound at $1.4891 as of 6am today.

EWJ - iShares Japan -We re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".

XLP - SPDR Consumer Staples- Consumer Staples continues to look negative as a TREND. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan

Trade-Up Insights Support Our Home Furnishing Call

The most recent list of Top 10 consumer trade ups as tracked by The Boston Consulting Group appears to support our belief that consumers expect to spend more time at home in 2009. Over the last four years, there has been a significant change in consumer focus. Big ticket items such as home/ apartment purchases, furniture, and travel/ vacations no longer top the list. Matter of fact, they no longer make it.

Instead, in-home items such bedding and home entertainment have moved into the top 5 and food that can be prepared at home (meat, fruits and vegetables, and fish and seafood) is an area of greater importance. Therefore, it’s no surprise that sit-down restaurants have also dropped down on the list.

The consumer purchasing survey simply reaffirms our view that investments are increasingly “need-based” versus “want-based.” As a result, consumers looking to spend more on their existing homes. We expect companies such as BBBY, WSM, and WMT to be the beneficiaries (see our 4/8 post “Our Home Furnishings Call is Getting Tough to Argue With”).

Trade-Up Insights Support Our Home Furnishing Call - 4 13 2009 10 05 26 PM

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UK: Don’t Ignore the Facts

While I’ve gotten quite bullish on the US retail supply chain, it’s tough for me to say the same about just about any part of Europe. That said, I’m not going to turn a blind eye to data points that suggest that just maybe we’re in the process of hitting bottom.


Several indicators suggest a less bearish trend…  the Consumer Confidence report, Consumer Credit Lending, Consumer Household Goods Consumption, and M&S results (Marks and Spencer).


The Consumer Survey for UK Spending Confidence on Household Goods is still ugly by most measures, but marked a bottom in January and has risen moderately over the past two months. 


The single largest move in the “Good time to buy” index occurred between November and December of 2008.  Consumers’ access to credit seems to have found a bottom in the same time period. 


M&S did better than bad with UK sales down 0.3% and same store sales down 3.7% in Food and 4.8% in Clothing and Home.


I’ll go to the mat with anyone that tries to label me a UK bull. But lining up the factors above can’t be ignored.


Zach Brown

Research Edge


UK: Don’t Ignore the Facts - UK Consumer Conf Chart


UK: Don’t Ignore the Facts - UK Spending


UK: Don’t Ignore the Facts - M S chart


Known Knowns: Taking Stock of Recent Data Points in Oil

Position: We are long oil via the etf, USO

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” –Donald Rumsfeld


Oil opened down sharply this morning on the back of newly released projections for global oil demand from the International Energy Administration.  The IEA cut its world demand for oil by 1MM barrels a day, down to 84.5MM barrels, which is down 2.8% y-o-y.  The bulk of this decline comes from the OECD, which the IEA predicts will see a 760K barrel decline in demand y-o-y to the 45.2MM barrel level, which is down 4.9% from 2008.  The non-OECD, or emerging economies, are projected to use 38.3MM barrels per day, down 0.1% y-o-y.


Obviously, IEA projections should be considered a lagging indicator as the economic information that underscores their projections is well known.  That said, given the rapid rise in the price of oil over the last four weeks, and the positive increase year-to-date, the commodity is obviously vulnerable to bad news.


These newly revised projections from the IEA coincide with some recent negative data points in the U.S. relating to the oil market.  First, in its “This Week in Energy” update the Department of Energy stated:


“Consider just gasoline and distillate, which together represent over 70 percent of refinery output from crude oil. Energy Information Administration weekly data indicate that for the first quarter, demand for these two products fell more than 3 percent in total, (with gasoline declining 1.5 percent and distillate demand falling 6.7 percent). Distillate demand, which is mainly driven by heavy-duty trucking, has been hit hard by the slowing economy.”


In the same report, the DOE reported days supply nationally of petroleum products, and for the second week in a row it came in at 25.4 days, which was more inventory than expected and an increase of 14.9% y-o-y.  This inventory build is not surprising given the aforementioned decline in demand, but will be concerning if we do not see the drawdown in gasoline this summer in the driving season.


The data points above are coincident with a front page article on the Wall Street Journal today, entitled: “Oil Industry Braces for Drop in U.S. Thirst For Gasoline.”  The basic premise of the article is that demand for gasoline in the U.S. may have peaked due to a combination of more fuel efficient cars, increased use of ethanol based fuels, and less overall commuting by Americans.   In the article, Scott Nauman, Exxon’s head of energy forecasting, predicted that “U.S. fuel demand to keep cars, SUVs and pickups moving will shrink 22% between now and 2030.”  This is meaningful since “transportation” in the U.S. accounts for 2/3s of all oil use.


While the data points above are new, the question is whether they are actually incremental, or as Rumsfeld said, are these datapoints “known knowns.” The Oil market has shaken off negative fundamental data points consistently year-to-date and is now trading off the lows of the day despite the lowered expectations for global demand from IEA this morning.


Obviously, the question we must ask ourselves—to once again borrow from Rumsfeld—what are the unknown unknowns that may be currently sustaining oil prices well above prior lows? Is it massive money supply growth globally? Heightened geopolitical risk implications? The likelihood is that there are a number of drivers, most of which will only be known after the fact.


In the aforementioned Wall Street Journal article, China is also noted as a region of long term growth of oil demand.  Longer term, the Client (as we like to call China) may in fact be the dominant factor.  While headlines and articles about Chinese energy demand were rampant during the heady days of $140 per barrel oil, they are now largely non-existent, even though the long term demand implications from China have not changed. 


Currently, there are 250MM registered cars in the United States, which equates to cars per capita of ~0.83.  China may never get close to that number, but at a current population of ~1.3BN people and only ~57MM registered vehicles on the road, or 0.04 per capita, the Client obviously has a long run way of growing energy demand, in just the transportation segment.  Ultimately, as always, price rules.  As of now oil is largely looking past short term bearish data points and seems to be, once again, endorsing the longer term bullish case, even though this investment case is absent from the headlines.


Daryl G. Jones
Managing Director

Squeezy The Shark: SP500 Levels, Refreshed...

Today is one of those days where there is a whole lot of nothing to do. My Partner, Rebecca Runkle, labeled it “The Calm Before The Storm” in her Technology note this morning, and that is exactly what this feels like.


All the while, the most important move today is the US Dollar breaking down through what I have as intermediate TREND line support. With the USD Index down -1.1% on its lows for the day, the SP500 is threatening to go green on the day. REFLATION remains a powerful force – one that remains somewhat misunderstood.


With today’s recovery from the opening lows, we have ourselves higher lows – this is, of course, another bullish indicator. I see no upside resistance until the dotted red line in the chart below at 868.


There is a very short term momentum line that is baking itself into this short squeeze cake at 830 SPX (dotted green line), and underneath that remains Squeezy The Shark, who is challenging anyone in the short selling community to press shorts on the way down to 821.


Keith R. McCullough
Chief Executive Officer

Squeezy The Shark: SP500 Levels, Refreshed...  - SPX


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