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Commodity Deflation

“We can’t afford to risk a downturn, no matter how much inflation.”

-Richard Nixon

 

Nixon’s legacy is Watergate. Trivial Pursuit presidential history doesn’t yet appreciate how horrendous he was for the US economy. On matters of economic policy, this guy was easily the most conflicted, conniving, and compromised president in the post WWII period.

 

If you’d like to re-educate yourself on the what, when and why (Nixon’s economic policies), chapter 4 “Gamble” of Volcker: The Triumph of Persistence is a beauty. The aforementioned quote came from Nixon during his 1972 re-election campaign.

 

Prior to that (1971), Nixon had already abandoned the Gold Standard and explicitly devalued the US Dollar. On the fiscal policy side, he hired a Democrat from Texas who polled well (John Connolly) to be Treasury Secretary. Connolly wrote later, “I was not an economist; I had really never studied monetary affairs. My experience with fiscal issues was limited largely to a familiarity with Congress…” (Volcker, pg 74)

 

Back to the Global Macro Grind

 

Why do we care about the context of politicized currency devaluations (and the local inflations they drive) this morning? Well, because the only opportunity the US economy has to grow (on a real inflation adjusted basis) is through pervasive Commodity Deflation. It’s a Tax Cut.

 

To be balanced, cracker jack economists who have never traded a market in their life (i.e. don’t understand price expectations) want you to believe that currency devaluation will give you the elixir of an exported life. Now that the Japanese Yen is crashing (-24% from where we made the short call in 2012), they’ll have to let us know how that is going for the Japanese consumer who isn’t levered long Nikkeis.

 

The biggest Global Macro calls for 2013 YTD have been centered squarely on understanding the causal impact central planners have on their domestic currency:

  1. Get the central plan right, you get the currency right
  2. Get the currency right, you get the correlation right
  3. Get the correlation right, you get the money

“Show me the money!” –Tom Cruise

 

To review, the US Dollar has been strengthening ever since Bernanke tried to promise to print to infinity and beyond (SEP2012):

  1. MONETARY POLICY: Since, on the margin, market expectations for an iQe5 upgrade have been crushed (see Gold chart)
  2. FISCAL POLICY: after plenty of political spending wants, the US actually implemented marginally hawkish spending cuts

Again, if you get policy (monetary and fiscal) right, you’re going to likely get the local currency move right. On the margin is what matters most in macro, and when you combine marginally hawkish domestic policy with relatively dovish competing policy (Japan), ta-dah!

 

Japan’s currency devaluation is very easy to understand (primarily because Japan’s #PoliticalClass is doing precisely what America’s did):

  1. MONETARY POLICY: hit CTRL+P (print) and step that Japanese debt monetization up to 50 TRILLION more Yens (a year)
  2. FISCAL POLICY: get the LDP to take the Upper House in this summer’s election and implement “spend your brains out 2.0”

In other words, even if we are dead wrong on the USA’s marginal policy shifts in 2013, we could be right on our #StrongDollar via the rate of change in Japanese policy. Layer on some European Marxism onto the Euro, and I have myself quite a Keynesian treat.

 

Hedgeye Playbook: how do you make money on this?

  1. Long US Dollars vs Short Yens
  2. Short Commodities (they have hyper high inverse correlations to #StrongDollar)
  3. Long Asian and US Consumption Equities

Some of our competitors can pop this in their next report. “Last night the Chinese reported more of the same on this front. #StrongDollar = Down Food Prices (globally) = Down Inflation (for countries that have a US Dollar peg).” Chinese CPI fell from 3.2% in FEB to 2.1% in MAR – and yes, that is better than a bad thing for people who don’t take government car service to work and have to eat.

 

I shorted Wheat (WEAT) on the bounce yesterday (unlike trying to call tops in the SP500, it’s always easier to short things that have already started going down – Wheat prices are down -8.4% YTD). Corn and soybean prices are down -9.3% and -2.9% YTD, respectively.

 

Brent Oil is down -5.7% YTD – but seriously? Who cares about these YTD Commodity Deflations when you can look at how epic they’ve been since Wall Street front-running Bernanke on Commodity prices ended (in food prices especially) at their all-time highs of September 2012? On a 6 month basis, Corn and Wheat are down -14.6% and -17.2%, respectively.

 

Nixon had it wrong – so did Charles de Gaulle, Jimmy Carter and George W. Bush. President Obama, like Clinton, has a choice on monetary and fiscal policy in his second term. Will he risk the Big Auto lobby for a weak currency? Folks, we need a #StrongDollar and Commodity Deflation. Oh yessir – Yes We Can.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1, $103.19-108.02, $82.42-83.39, 95.23-99.31, 1.71-1.83%, 12.21-14.43, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Commodity Deflation - Chart of the Day

 

Commodity Deflation - Virtual Portfolio


JCP: The Board Should Resign

Takeaway: We think that firing RJ at this juncture opens JCP up to risks that were previously not part of the equation. Ullman? Seriously???

This note was originally published April 08, 2013 at 19:41 in Retail

After being short JCP from the Ackman/Johnson $40 ‘$9-$12 in earnings power’ hype, we pulled a 180 at $19 earlier this year based on our view that liquidity concerns were overblown, and that the stock would start to turn when the better productivity from the new shops rollout improved the sales delta. Without a doubt, the call was too soon and the subsequent $4/$5 drop in the stock was painful. But the reality is that the research did not change anywhere near as much as the sentiment did, so we kept this name on our Best Ideas list.  But we were vocal several times in saying that the one thing that could make us cut bait on our call is if the Board bowed to Wall Street’s bantering and fired Johnson at this juncture (see our 3/6 Note below “Why Firing Johnson Is The Fastest Way To Ch 11) . Well…Johnson is out, and we're cutting bait. There could be more downside to come.  

 

 

This Action Raises More Questions Than It Does Answers

  1. We think that this move is either six months too late, or six months too soon, but definitely ill-timed today.  The Board should fire the guy when either a) his pricing strategies are failing miserably due to botched execution (mid 2012), or b) when the shop-in-shop strategy – the real reason why you hired him – proves to be unsuccessful (end of 2013). Unless there was a dramatic negative turn of events over the past two weeks (which is possible), it is perplexing to think of why they would get rid of him today as opposed to seeing if the shop strategy works. The Board should show a little transparency into its process and personal accountability for its actions.
  2. Mike Ullman is the new CEO, again. Seriously? The stock initially traded up nearly 15% on the announcement that RJ, America’s most hated CEO, was out. That’s about what we’d expect. But once the company disclosed that that Mike Ullman was stepping in, the stock gave up nearly 20%. What does that say about the market’s confidence in Ullman?
  3. Did anyone else even want the job? Mickey Drexler? No way. Alan Questrom? Possibly. But we think he’s smart enough to pass on the job because JCP is so stuck between a rock and a hard place – not having the financial capital to change directions, and potentially lacking the human capital to stay on the existing course set by RJ. The job bank here was really thin.
  4. Lipstick on the Pig? One potential bullish signal would be whether the Board put Ullman in place for an interim period so he can calm the troops, stabilize the business, and put enough perfume and lipstick on the pig so that it can be taken private. We wouldn’t bank on this one, nor would we invest based on it. But we can’t count it out, either.
  5. Capital Considerations: Unless JCP is prepping for a sale, the likelihood of a capital raise just went up – and it went up materially. It’s pretty easy for a new CEO to step up and say “I need money to clean-up the problems caused by my predecessor.”  The reality is that if Ullman wants to go down a new path with the strategy, he will definitely need capital.

 

We think that the risks we initially highlighted (below) are still very much alive.

We’ve going to let this stock breathe for a bit. After it settles, if the quantitative factors support the call, we’ll have no problem shorting it – even if it’s at a price lower than $14. Real estate value is only $7-$8. And if Ullman can’t pull a rabbit out of his hat on this sucker, there’s no reason it can’t go lower.

 

 

 

04/08/13 05:12 PM EDT

JCP: WHY FIRING JOHNSON IS THE FASTEST PATH TO CH11

 

Conclusion: Contrary to what others are recommending today, we think that firing Ron Johnson is just about the stupidest thing that the JCP Board could do right now. If they did fire him, we think that it would be the quickest path to bankruptcy for JCP. Sentiment seems to us that the stock would go up on that news. But if we saw him ousted we’d likely short this name with impunity -- even with the sell-side capitulating at a price of $14/15. We think losing Johnson would pose significant vendor/brand risk, and would back JCP into a corner to liquidate its real estate at a discount.

 

A new CEO would be faced with a binary decision tree. Either A) Return to being the lowest-quality department store in America, or B) carry out Johnson’s shop-in-shop plan better than RJ could on his own. Johnson clearly blew himself up in 2012, but we don’t put blind faith in the ability for anyone to come in and implement this plan any better. Keep in mind that 75% of the problems JCP has had have little to do with changing up the shop format and upgrading the merchandise assortment – it was largely due to RJ getting the pricing/marketing/value proposition wrong on the existing merchandise. Letting RJ run with the current plan might carry more risk as 2013 unfolds – but doing it without him is riskier, with potentially more significant financial pain.

 
1) First off, once a cucumber becomes a pickle, you can’t reverse the process. It already has architected its square footage to new shops, chosen new partner brands, and gotten rid of hundreds of vendors to make room for what is coming down the pike. That cannot be undone, which leads us to the conclusion that a new leader would need to move forward with the current plan – or something pretty darn close to it. Unfortunately, JCP does not have the liquidity for a new CEO to shake the Etch-a-Sketch clean, start over, and create a new plan. The lack of capital deprives JCP of the oxygen needed to go down a new path.
 
2) Ron Johnson has spent easily a third of his time ensuring that the right brands/vendors are chosen, and then collectively working with the brands and his merchants to make sure that the right product is in the right place inside the store. Whether you like RJ or not, the reality is that the vendors still like him – a lot. They buy into the long term vision (even if no one on Wall Street does). We’re relatively certain that at least a few large vendors would balk at rolling out product inside JCP if leadership and strategy changed dramatically.  
 
3) If that were the case, JCP would be left half-pregnant.  It wouldn’t be able to fill the shelves quickly with legacy product (i.e. become the old, poor quality JC Penney), and the product that should ultimately drive traffic under the new plan is at risk of never becoming a reality. Then we can build to an algorithm where comps are down another 20-30%, and not only is JCP forced to use its full revolver, but to liquidate its real estate, which we estimate to be worth about $1.8bn-$2.1bn (see our note from last night “JCP: Duration Matters More Than Ever’) to fund operating losses.
 
4) Allen Questrom, the Godfather of retail (we mean that in a complimentary way), was on CNBC [on 3/8] talking about why RJ should be fired immediately. He said that the Board needs to admit its mistake and move on. At face value this carries a lot of weight given that Questrom is the only person to successfully turn around JC Penney. But let’s be real. When Johnson went down the path of ‘reinventing’ JCP, Questrom did not make the cut of people he leaned on to consult about a solution. Questrom likely viewed that as a snub, and also probably has little patience for anyone that is seemingly destroying something that he worked so hard to fix. Not really a shocker that Questrom is on the short list of people recommending that he’s ousted due to 2012’s failures. Also keep in mind that he’s on the short list of people that would be considered for the top job (though we have no reason to think that he’d want it).


JCP: Firing Johnson Is The Path To Ch11

Takeaway: Contrary to what others are recommending, we think that firing RJ is the fastest way to realizing the liquidity crunch bear case.

This note was originally published March 06, 2013 at 15:19 in Retail

Conclusion: Contrary to what others are recommending today, we think that firing Ron Johnson is just about the stupidest thing that the JCP Board could do right now. If they did fire him, we think that it would be the quickest path to bankruptcy for JCP. Sentiment seems to us that the stock would go up on that news. But if we saw him ousted we’d likely short this name with impunity -- even with the sell-side capitulating at a price of $14/15. We think losing Johnson would pose significant vendor/brand risk, and would back JCP into a corner to liquidate its real estate at a discount.

 

A new CEO would be faced with a binary decision tree. Either A) Return to being the lowest-quality department store in America, or B) carry out Johnson’s shop-in-shop plan better than RJ could on his own. Johnson clearly blew himself up in 2012, but we don’t put blind faith in the ability for anyone to come in and implement this plan any better. Keep in mind that 75% of the problems JCP has had have little to do with changing up the shop format and upgrading the merchandise assortment – it was largely due to RJ getting the pricing/marketing/value proposition wrong on the existing merchandise. Letting RJ run with the current plan might carry more risk as 2013 unfolds – but doing it without him is riskier, with potentially more significant financial pain.

 
1) First off, once a cucumber becomes a pickle, you can’t reverse the process. It already has architected its square footage to new shops, chosen new partner brands, and gotten rid of hundreds of vendors to make room for what is coming down the pike. That cannot be undone, which leads us to the conclusion that a new leader would need to move forward with the current plan – or something pretty darn close to it. Unfortunately, JCP does not have the liquidity for a new CEO to shake the Etch-a-Sketch clean, start over, and create a new plan. The lack of capital deprives JCP of the oxygen needed to go down a new path.
 
2) Ron Johnson has spent easily a third of his time ensuring that the right brands/vendors are chosen, and then collectively working with the brands and his merchants to make sure that the right product is in the right place inside the store. Whether you like RJ or not, the reality is that the vendors still like him – a lot. They buy into the long term vision (even if no one on Wall Street does). We’re relatively certain that at least a few large vendors would balk at rolling out product inside JCP if leadership and strategy changed dramatically.  
 
3) If that were the case, JCP would be left half-pregnant.  It wouldn’t be able to fill the shelves quickly with legacy product (i.e. become the old, poor quality JC Penney), and the product that should ultimately drive traffic under the new plan is at risk of never becoming a reality. Then we can build to an algorithm where comps are down another 20-30%, and not only is JCP forced to use its full revolver, but to liquidate its real estate, which we estimate to be worth about $1.8bn-$2.1bn (see our note from last night “JCP: Duration Matters More Than Ever’) to fund operating losses.
 
4) Allen Questrom, the Godfather of retail (we mean that in a complimentary way), was on CNBC today talking about why RJ should be fired immediately. He said that the Board needs to admit its mistake and move on. At face value this carries a lot of weight given that Questrom is the only person to successfully turn around JC Penney. But let’s be real. When Johnson went down the path of ‘reinventing’ JCP, Questrom did not make the cut of people he leaned on to consult about a solution. Questrom likely viewed that as a snub, and also probably has little patience for anyone that is seemingly destroying something that he worked so hard to fix. Not really a shocker that Questrom is on the short list of people recommending that he’s ousted due to 2012’s failures. Also keep in mind that he’s on the short list of people that would be considered for the top job (though we have no reason to think that he’d want it).

 


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 9, 2013


As we look at today's setup for the S&P 500, the range is 22 points or 0.77% downside to 1551 and 0.64% upside to 1573.     

                                                                                                                          

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.49 from 1.49
  • VIX closed at 13.19 1 day percent change of -5.24%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus Optimism, March, est. 90.3 (prior 90.8)
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 9:30am: Fed’s Lacker speaks in Richmond, Va.
  • 10am: Wholesale Inventories, Feb., est. 0.5% (prior 1.2%)
  • 10am: Wholesale Sales M/m, Feb., est. 1.5% (prior -0.8%)
  • 10am: JOLTs Job Openings, Feb., est. 3.730m (prior 3.693m)
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $32b 3Y notes
  • 1pm: Fed’s Lockhart gives remarks at Atlanta Fed conference
  • 4:30pm: API energy inventories

     GOVERNMENT:

    • House, Senate in session
    • Officials from OMB, European Commission meet to discuss regulatory compliance, U.S.-EU trade deal, 9am
    • Senate Armed Svcs panel holds hearing on counterterrorism, defense authorization, 2:15pm
    • Alberta Premier Alison Redford speaks at Brookings Inst on Keystone XL Pipeline, 2pm

WHAT TO WATCH

  • Bernanke says Fed to press U.S. banks to cut liquidity risk
  • J.C. Penney’s post-Johnson options seen to include sale
  • Billabong to assess $299m buyout by Sycamore Group
  • KPMG fires senior partner over alleged inside trading: NYT
  • Warsaw exchange said to hold merger talks w/Vienna bourse
  • Microsoft, Nokia complain to EU on Google’s Android dominance
  • Chevron resuming Brazil output signals end to spill dispute
  • First Solar holds analyst mtg, to face questions as Brown leaves
  • China tightening pressure eases with March inflation
  • New Hampshire asks MTBE jury for $236m from Exxon
  • Microsoft Surface tablet warranty criticized in China
  • Airbus juggles order book on record demand for A320neo jet
  • German exports declined in Feb. amid euro-area recession
  • Qantas targets Hong Kong approval for airline by year end

EARNINGS:

    • Pricesmart (PSMT) 4:05pm, $0.77

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Codelco Workers Begin Strike at Copper Mines for 24 Hours
  • Corn Boom Goes Bust With U.S. Sales in Record Drop: Commodities
  • Copper and Zinc Rise as China Inflation Eases Tightening Concern
  • Corn Gains as Wet Weather May Delay U.S. Plantings; Wheat Falls
  • Gold Swings as Investors Weigh Stimulus Against Recovery Signs
  • Robusta Coffee Falls as Investors May Keep Selling; Cocoa Gains
  • European Cocoa Processing Probably Dropped 2.4% in First Quarter
  • Wheat Harvest in India Set for Record on High-Yield Seeds, Rains
  • Crude Supplies Climb From 22-Year High in Survey: Energy Markets
  • SGX Prepared for ‘Modest Pickup’ in AsiaClear Iron Ore Futures
  • Killing Keystone Seen as Risking More Oil Spills by Rail: Energy
  • Antofagasta Sees Copper Tight as Stock Climb Belies Price Bets
  • Dinosaur Egg Carriers Losing Ground vs. Membrane LNG Tankers
  • WTI Crude Advances a Second Day; Goldman Shifts Spread Forecast

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


MACAU: MARCH DETAIL

Here is our more detailed review of March Macau gaming revenues

 

 

As we wrote about this morning, Macau had an outstanding month although not quite as good as the +25% headline.  If hold is normalized across both YoY periods, growth would have been 16%. Here is the detail.

 

Y-O-Y TABLE OBSERVATIONS

 

Total table revenues grew 26%, the highest growth since Jan 2012.  Mass revenue growth remain strong at 30%, in-line with its 6-month trailing average.  VIP revenues grew 25% while Junket RC volume grew 10% in March, its best monthly performance since April 2012.

 

LVS

 

Table revenues grew 61% YoY.  Sands China led the market in terms of mass revenue, VIP revenue, and VIP RC growth.  We estimate that Sands China held at 3.15% vs 2.85% last year, adjusted for direct play of 16%.

  • Sands grew 4% YoY, snapping 4 month losing streak  
    • Mass grew 9%
    • VIP was flat, reversing 4 months of declines.  We estimate that Sands held at 3.6% compared to 3.0% in the same period last year.  We assume 10% direct play in March vs 11% in March 2012
    • Junket RC fell 17%
  • Venetian grew 23% YoY 
    • Mass increased 21%
    • VIP grew 25%
    • Junket VIP RC fell 5%, its 13th decline in the past 14 months
    • Assuming 28% direct play, hold was 3.45% compared to 2.61% in March 2012, assuming 27% direct play 
  • Four Seasons dropped 19% YoY, marking the 3rd consecutive month of declines
    • Mass revenues soared 100%, a month after falling 19%
    • VIP tumbled 32% but Junket VIP RC grew 3% as hold in March (assuming 14% direct play) was 2.16% vs 3.03% in March 2012 when direct play was 16%
  • Sands Cotai Central produced $260MM in revs March, a new record
    • Mass and VIP hit new monthly records, $77MM and $184MM, respectively 
    • Junket RC volume of $4.8BN, up 17% MoM and a new high
    • If we assume that direct play was 11%, hold would have been 3.42% 

WYNN

 

Wynn table revenues grew 16% in March

  • Mass was up 20%, the best growth since Jan 2012 
  • VIP grew 14% while junket RC fell 22%.  
    • Aside from a 1% gain in November, 10 of the last 11 consecutive months have been in the red
  • Assuming 11% of total VIP play was direct, we estimate that hold was 3.37% compared to 2.34% last year (assuming 10% direct play).

MPEL

 

MPEL table revenue grew 21%.  Hold was low at 2.73% vs 3.09% last year.

  • Altira revenues grew 1%, with a 6% decrease in Mass and a 2% increase in VIP revenue
    • VIP RC grew 16%
    •  We estimate that hold was 2.90%, compared to 3.37% in the prior year
  • CoD table revenues grew 30% YoY
    • Mass popped 43%, continuing its impressive streak of strong double-digit gains since inception
    • RC grew 36%, the biggest growth since Nov 2011
    • Assuming a 18% direct play level, hold was 2.64% in March compared to 2.93% last year (assuming 16% direct play)

SJM

 

Table revenue grew 28%, SJM's strongest performance since Sept 2011

  • Mass revenue eked out a 1% gain, the lowest of the 6 concessionaires for the 2nd consecutive month
  • VIP grew 41% and junket RC gained 6%
  • Hold was 3.54%, compared with 2.66% last March

GALAXY

 

Galaxy table revenues grew 13%.  Mass rose 39%, its slowest growth since Jan 2011, while VIP gained 7%. Across its two owned properties, Galaxy held at 3.37% vs. 3.00% in March 2012.

  • StarWorld table revenues gained 2%
    • Mass rocketed 69% higher
    • VIP fell 4%.  VIP revenues fell in 8 of the last 9 months
    • Junket RC fell 7%, marking the 10th month of consecutive declines
    • Hold was normal at 3.11% vs 2.97% last March
  • Galaxy Macau's table revenues grew 24%
    • Mass grew 31%
    • VIP grew 21%, while RC gained 1%. RC volume growth has been hovering around zero for the last 8 months
    • Hold was high in March at 3.61% vs. 3.02% last year

MGM

 

MGM table revenue grew 14% in March

  • Mass revenue grew 34%
  • VIP revenue grew 8%, on 38% RC growth
  • If direct play was 9%, then March hold was 2.31% compared to 3.00% last year

 

SEQUENTIAL MARKET SHARE

 

LVS

 

LVS’s MoM share fell 0.5% to 20.9% in March, in-line with its 6-month average and better than the 2012 average share of 19.0%.

  • Sands' share gained 70bps to 3.6%.  For comparison purposes, 2012 share was 3.9% and 6M trailing average share was 3.6%.
    • Mass share ticked up 40bps to 5.5%
    • VIP rev share rose 90bps to 2.9%
    • RC share was 2.3%, down 50 bps and a hit an all time low for the property
  • Venetian’s share fell 180bps to 7.4%.  2012 share was 7.9% and 6 month trailing share was 8.2%.
    • Mass share declined 140bps to 13.8%
    • VIP share fell 170bps to 5.0%
    • Junket RC share dropped 50bps to 3.5%, only 30bps above the properties' all time low
  • FS gained 50bps to 2.6%.  This compares to 2012 share of 3.7% and 6M trailing average share of 3.0%.
    • VIP gained 50bps to 2.8%
    • Mass share rose 70bps to 2.2%
    • Junket RC lost 40bps to 3.8%
  • Sands Cotai Central's table market share gained 10bps to 6.9%, a new high, and compares to the 6M trailing average share of 5.8%.
    • Mass share declined 0.5% to 7.4%.
    • VIP share gained 0.3% to 6.7%
    • Junket RC share gained 0.1% to 5.9%

WYNN


Wynn lost 60bps to 11.2% share in March.  Wynn’s 2012 share averaged 11.9% and their 6-month trailing share averaged 11.1%.  

  • Mass share was unchanged at 8.4%
  • VIP share of 12.1%, 1.1% lower
  • Junket RC share decreased 150bps to 10.8%, only 20bps above the Wynn's all time low

MPEL

 

MPEL’s gained 80bps of share to 13.6%, in-line with their 6 month trailing share of 13.7% and their 2012 share of 13.5%.  

  • Altira’s share rose 40bps to 3.7%, below its 6M trailing share of 3.9% and below its 12-month share of 3.9%
    • Mass share slipped 0.3% to 1.1%
    • VIP gained 60bps to 4.7%
    • VIP RC share rose 50bps to 5.3%
  • CoD’s share gained 40bps to 9.7%.  March’s share was a little above the property’s 2012 and 6M trailing share of 9.4% and 9.6%, respectively.
    • Mass market share was unchanged at 12.1%
    • VIP share rose 0.6% to 8.7%
    • Junket share declined 30bps to 9.3%

SJM

 

SJM was the biggest share gainer, rising 1.5% to 26.9% due to hold.  March's share compares to their 2012 average of 26.7% and its 6M trailing average of 26.5%.

  • Mass market share fell 2.1% to 25%, an all-time company low
  • VIP share rose 280bps to 28.6%
  • Junket RC share lost 0.4% to 27.3%

GALAXY


Galaxy's share of 18.4% was unchanged MoM, below its 2012 average share of 19.0% but above its 6-month average of 18.2%

  • Galaxy Macau share declined 0.5% to 10.3%
    • Mass share gained 20bps to 9.7%
    • VIP share decreased 0.8% to 10.5%
    • RC share gained 10bps to 9.9%
  • Starworld share gained 40bps to 7.2%
    • Mass share gained 80bps to 3.8%
    • VIP share rose 30bps to 8.6%
    • RC share rocketed 120bps higher to 9.3%

MGM

 

MGM was the biggest share loser, giving up 120bps of share due all to hold. Its March share of 8.9% is below their 6M average of 9.6% and above their 2012 share of 9.9%

  • Mass share exploded 210bps higher to 8.2%
  • VIP share fell 220bps to 9.0%
  • Junket RC rose 170bps to 11.9%

 

Slot Revenue

 

Slot revenue grew only 7% YoY to $147MM in March.

  • Galaxy had the best growth at 31% to $20MM
  • LVS grew of 30% to $44MM
  • MPEL grew 6% YoY to $27MM
  • WYNN fell 2% to $21MM
  • MGM dropped 11% to $21MM
  • SJM had the worst YoY slot performance, losing 20% to $15MM

 

MACAU: MARCH DETAIL - table2

 

MACAU: MARCH DETAIL - mass1

 

MACAU: MARCH DETAIL - rc3


JCP: The Board Should Resign

Takeaway: We think that firing RJ at this juncture opens JCP up to risks that were previously not part of the equation. Ullman? Seriously???

After being short JCP from the Ackman/Johnson $40 ‘$9-$12 in earnings power’ hype, we pulled a 180 at $19 earlier this year based on our view that liquidity concerns were overblown, and that the stock would start to turn when the better productivity from the new shops rollout improved the sales delta. Without a doubt, the call was too soon and the subsequent $4/$5 drop in the stock was painful. But the reality is that the research did not change anywhere near as much as the sentiment did, so we kept this name on our Best Ideas list.  But we were vocal several times in saying that the one thing that could make us cut bait on our call is if the Board bowed to Wall Street’s bantering and fired Johnson at this juncture (see our 3/6 Note below “Why Firing Johnson Is The Fastest Way To Ch 11) . Well…Johnson is out, and we're cutting bait. There could be more downside to come.  

 

 

This Action Raises More Questions Than It Does Answers

  1. We think that this move is either six months too late, or six months too soon, but definitely ill-timed today.  The Board should fire the guy when either a) his pricing strategies are failing miserably due to botched execution (mid 2012), or b) when the shop-in-shop strategy – the real reason why you hired him – proves to be unsuccessful (end of 2013). Unless there was a dramatic negative turn of events over the past two weeks (which is possible), it is perplexing to think of why they would get rid of him today as opposed to seeing if the shop strategy works. The Board should show a little transparency into its process and personal accountability for its actions.
  2. Mike Ullman is the new CEO, again. Seriously? The stock initially traded up nearly 15% on the announcement that RJ, America’s most hated CEO, was out. That’s about what we’d expect. But once the company disclosed that that Mike Ullman was stepping in, the stock gave up nearly 20%. What does that say about the market’s confidence in Ullman?
  3. Did anyone else even want the job? Mickey Drexler? No way. Alan Questrom? Possibly. But we think he’s smart enough to pass on the job because JCP is so stuck between a rock and a hard place – not having the financial capital to change directions, and potentially lacking the human capital to stay on the existing course set by RJ. The job bank here was really thin.
  4. Lipstick on the Pig? One potential bullish signal would be whether the Board put Ullman in place for an interim period so he can calm the troops, stabilize the business, and put enough perfume and lipstick on the pig so that it can be taken private. We wouldn’t bank on this one, nor would we invest based on it. But we can’t count it out, either.
  5. Capital Considerations: Unless JCP is prepping for a sale, the likelihood of a capital raise just went up – and it went up materially. It’s pretty easy for a new CEO to step up and say “I need money to clean-up the problems caused by my predecessor.”  The reality is that if Ullman wants to go down a new path with the strategy, he will definitely need capital.

 

We think that the risks we initially highlighted (below) are still very much alive.

We’ve going to let this stock breathe for a bit. After it settles, if the quantitative factors support the call, we’ll have no problem shorting it – even if it’s at a price lower than $14. Real estate value is only $7-$8. And if Ullman can’t pull a rabbit out of his hat on this sucker, there’s no reason it can’t go lower.

 

 

 

04/08/13 05:12 PM EDT

JCP: WHY FIRING JOHNSON IS THE FASTEST PATH TO CH11

 

Conclusion: Contrary to what others are recommending today, we think that firing Ron Johnson is just about the stupidest thing that the JCP Board could do right now. If they did fire him, we think that it would be the quickest path to bankruptcy for JCP. Sentiment seems to us that the stock would go up on that news. But if we saw him ousted we’d likely short this name with impunity -- even with the sell-side capitulating at a price of $14/15. We think losing Johnson would pose significant vendor/brand risk, and would back JCP into a corner to liquidate its real estate at a discount.

 

A new CEO would be faced with a binary decision tree. Either A) Return to being the lowest-quality department store in America, or B) carry out Johnson’s shop-in-shop plan better than RJ could on his own. Johnson clearly blew himself up in 2012, but we don’t put blind faith in the ability for anyone to come in and implement this plan any better. Keep in mind that 75% of the problems JCP has had have little to do with changing up the shop format and upgrading the merchandise assortment – it was largely due to RJ getting the pricing/marketing/value proposition wrong on the existing merchandise. Letting RJ run with the current plan might carry more risk as 2013 unfolds – but doing it without him is riskier, with potentially more significant financial pain.

 
1) First off, once a cucumber becomes a pickle, you can’t reverse the process. It already has architected its square footage to new shops, chosen new partner brands, and gotten rid of hundreds of vendors to make room for what is coming down the pike. That cannot be undone, which leads us to the conclusion that a new leader would need to move forward with the current plan – or something pretty darn close to it. Unfortunately, JCP does not have the liquidity for a new CEO to shake the Etch-a-Sketch clean, start over, and create a new plan. The lack of capital deprives JCP of the oxygen needed to go down a new path.
 
2) Ron Johnson has spent easily a third of his time ensuring that the right brands/vendors are chosen, and then collectively working with the brands and his merchants to make sure that the right product is in the right place inside the store. Whether you like RJ or not, the reality is that the vendors still like him – a lot. They buy into the long term vision (even if no one on Wall Street does). We’re relatively certain that at least a few large vendors would balk at rolling out product inside JCP if leadership and strategy changed dramatically.  
 
3) If that were the case, JCP would be left half-pregnant.  It wouldn’t be able to fill the shelves quickly with legacy product (i.e. become the old, poor quality JC Penney), and the product that should ultimately drive traffic under the new plan is at risk of never becoming a reality. Then we can build to an algorithm where comps are down another 20-30%, and not only is JCP forced to use its full revolver, but to liquidate its real estate, which we estimate to be worth about $1.8bn-$2.1bn (see our note from last night “JCP: Duration Matters More Than Ever’) to fund operating losses.
 
4) Allen Questrom, the Godfather of retail (we mean that in a complimentary way), was on CNBC [on 3/8] talking about why RJ should be fired immediately. He said that the Board needs to admit its mistake and move on. At face value this carries a lot of weight given that Questrom is the only person to successfully turn around JC Penney. But let’s be real. When Johnson went down the path of ‘reinventing’ JCP, Questrom did not make the cut of people he leaned on to consult about a solution. Questrom likely viewed that as a snub, and also probably has little patience for anyone that is seemingly destroying something that he worked so hard to fix. Not really a shocker that Questrom is on the short list of people recommending that he’s ousted due to 2012’s failures. Also keep in mind that he’s on the short list of people that would be considered for the top job (though we have no reason to think that he’d want it).


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