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Credit has been the overriding factor in driving gaming equities for more than a year.  Leverage, liquidity, covenants, etc. are a bigger part of my lexicon than ever before.  The good news is the overall credit markets are on fire and are open for business.


The gaming regionals have done their part in "colluding" to pry the markets open by blowing out their respective quarters.  The average gaming bond yield is down 350bps in the last two weeks alone and down 875bps in less than 2 months.  These are huge moves, as can be seen below in some selected examples.




PNK, PENN, and ASCA all have credit facilities that mature next year.  This wide crack in the markets presents the right time for these companies to shore up their balance sheets.  All three of the companies could end up floating bonds with sub 10% yields.  ASCA is probably the wild card given the higher leverage.  Nevertheless, we believe successful debt raises would be positive for the equities of these companies and also the entire sector.


With balance sheets secure (no liquidity, refinancing, or covenant issues) and free cash flow accelerating, FCF yields should come down (stocks higher).  We need to reevaluate our prior 15% FCF target yield for the regionals, especially since FCF is based on what could be trough EBITDA.

Roubini's Global Apocalypse, Not Anymore...

Korean exports are down massively, but still better than expected and showing real signs of a bottom


South Korean customs data released last night show exports for April at an estimated $31 billion, a -19% year-over-year decline but still better than almost every observer expected.  Critically, this was the third sequential improvement on an absolute dollar basis.
(see charts and continued text below)


Roubini's Global Apocalypse, Not Anymore...  - kor1


On one hand, like the recent Japanese trade data, this could be brushed off as just another signal that the Chinese stimulus plan is now in motion and the wheels of commerce are starting to move for every part of the Asian supply chain. Significantly though, the weak won puts Korean exporters at an advantage over Japanese competitors (see chart below).


Roubini's Global Apocalypse, Not Anymore...  - kor2


Korean heavy industrials are in the global top tier and, as the Chinese Ox requires more heavy equipment, trucks, ships etc., they will be more than happy to oblige. Overlapping political considerations may cause Chinese tech buyers to favor products originating from the (in their view) prodigal Taiwanese, but when it comes to heavy metal it's hard to beat a cheap-won high-quality Korea.


The Korean economy has profound structural damage that will take years to sort out as their financial system rights itself. Also, the insane sibling state on their Northern border injects a large degree of event risk. Having said all that, if the currency situation remains relatively unchanged , it might be somewhat tempting long to pair against a Japanese short.


Andrew Barber

Squeezy's Animalistic Spirit

Confidence among U.S. consumers rose in April to its highest since September 2008, the month that Lehman Brothers filed chapter 11. Today, the Reuters/University of Michigan reported that "final" index of consumer sentiment rose to 65.1, the second straight monthly improvement - from 57.3 in March.  As a point of reference, the index reached a three-decade low of 55.3 in November 2008 (and people then started reading books about Great Depressions)...


Hammering home the Research Edge MACRO - MEGA Theme; (M) record low mortgage rates, (G) cheap gasoline and (A - Assets) surging stock prices are providing a stimulant the American consumer - despite rising unemployment (at a lesser rate)...


We're not Keynesians, but Keynes has some great one liners. "Animal spirits" is the term John Maynard Keynes used in his book "The General Theory of Employment, Interest and Money" to describe emotion which influences human behavior and can be measured in terms of consumer confidence.


"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."


John M Keynes, The General Theory of Employment, Interest and Money, London: Macmillan, 1936, pp. 161-162.


Howard Penney
Managing Director


Squeezy's Animalistic Spirit  - sent

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Relax, Have A Starbucks

"Expect more than others think possible."
-Howard Shultz, CEO Starbucks
This weekend, Starbucks will be running their first new ads in the New York Times. My Partner, Howard Penney, flashed me with the new ad strategy this morning and it struck me as being a metaphor for this year's stock market.
Relative to competing with the peak consumer spending cycle (2006 Edition) of Weekend at Barney's, is this a good time for a company to be buying prime time advertising? If properly brewed, unlike cheap coffee, cheap national advertising rates have their P&L perks...
The other Howard, as in Shultz, has never been accused of having a self confidence problem. Like Howard Penney, he's my kind of guy - he's going to bring that puck right to the net, and hard... no matter where you go out there on the ice, there he is...
Not to be confused with Dave "The Hammer" Shultz, who holds the NHL record for penalty minutes in a season (472), Howard Shultz's new slogan is "Beware of a cheaper cup of coffee... it comes with a price"... When it comes to the stock market advice you've been getting from Washington to Wall Street these days, ain't that the sad truth.
Of course, most of you know that Penney and I have been long Starbucks and short McDonald's this year. And yes, you can call me out for pushing my own book this morning and allocating air time to whatever it may be that would give my book a continued "pop" on the market open... but guess what, I'm not Cramer, and I don't have a book with client assets in it anymore - the only "pop" I care about is that ole school boxing kind from Dave Shultz and the Cinderella Man, Jimmy Braddock, "Pop, Pop, Bang!"
That's the feeling that some of Wall Street's finest have in their gut this morning when it comes to being on the other side of the two Howards - these guys have the hot hand! For those of you who like to keep a marked-to-market score in this game, Starbucks (SBUX) is now up +52% YTD. Ahead of this week's reported SBUX quarter, 3 sell side analysts downgraded it - "Pop, Pop, Bang!"
As we scaled the heights into to that SP500 morning strength that I said I was going to sell into yesterday morning (and I did), we saw the Depressionista Roubinis and Robusta "Hedgies" covering SPY prints of 877, then 880, then 885, then 888... "Pop, Pop, Bang!"
What is a McDonald's Man to do as this flurry to the solar plexus is pounding him on the short side into month end? Making matters worse, into intermediate term stock market highs MCD was tailing off to being DOWN on the day! Should a man cry? Blame the Great Depression? Or just call this "impossible" to trade? There's no crying in being a stock market operator!
The New Reality is more of a long standing reality, and that's that this market waits for no one. Being long McDonald's is about as consensus as consensus gets. If you disagree with that, check the scoreboard again. For 2009 YTD, MCD down -14%...
Ah, there it is again... that self promoting Big Mac McCullough character pushing his book... but wait, unlike John Mack, he doesn't have a book... his clients do...
I'm making this note a little lighter than most this morning, because I really just need a break. I've been pounding these keys on a lot of things that could be considered bullish over the course of the last 3 months, and I think I'm just ready to sit back... have my Starbucks this morning, and watch...
The New Reality is that there is no edge in NOT expecting "more than others think possible." There is no edge in chasing fire engines. There is no edge in assuming that one's performance in this business isn't as cyclical as anything else is in life. We all wake up every morning and tee ourselves up to win or to lose - in the end, no matter where we go, there the score is...
The Research Edge in America lies where it always has - in being your own process, doing your own work, coming to your own conclusions.
After you go on a performance run like we have (all of our closed positions are at www.researchedgellc.com/stock_positions/portfolio_history <http://www.researchedgellc.com/stock_positions/portfolio_history> ), sometimes the best thing to do is book it. Take down exposure to the market, and your respective winners. Don't let the fans from the cheap seats get you to gasp for the last leg of a squeeze that you proactively prepared for...
As my wonderful wife, Laura, likes to say, "just take a deep breath"... and maybe splurge on a Starbucks or something.
This is America - my name is Keith McCullough - and I support this anti-consensus message.
Have a great weekend with your families,


EWD - iShares Sweden-We bought Sweden on 4/30 with the etf down on the day and as a hedge against our Swiss short position. Sweden is up a healthy 15.3% YTD and has bullish fundamentals. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up and for the country to show positive GDP growth in late '09.

VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 4/30, getting long their fear of being squeezed.

EWC - iShares Canada- 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.   

XLE - SPDR Energy- Energy is breaking out on a TREND and TRADE duration. We're long this sector and think it works higher if the Buck breaks down.   

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

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.

USO - Oil Fund-We bought more oil on 4/20 after a 9% intraday downward move. We 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. 

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%.

DIA  - Diamonds Trust- The Dow is not the Nasdaq. We agree with the Depressionista camp that right here, we're intermediate term "overbought". 

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.

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 up versus the USD at $1.3256. The USD is up versus the Yen at 99.4360 and down versus the Pound at $1.4904 as of 6am today.

XLP - SPDR Consumer Staples- Consumer Staples was overbought so we shorted more on 4/29.  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.


Similar to almost every company we follow, HOT has done a great job cutting costs to partially offset brutal revenue declines, of which 75% are permanent, according to the company.  On the "less bad" thesis the stock, along with our universe, exploded off the March 9th lows.  Stabilization is a powerful catalyst when stocks fall 75%.  For HOT, two questions remain:  How stable is stable and are their more legs to the stabilization thesis.


I get the stabilization thesis, the reflation thesis, the "less bad" thesis.  Research Edge and my team were early on this call for consumer stocks.  After listening to the HOT call and reviewing the lodging data, I don't see a near-term recovery scenario, and even the veracity of the stabilization call can be challenged.  Consider the following comments by HOT's CEO from yesterday's call:


  • "We are seeing signs everywhere that there is some stabilization. Occupancies worldwide appear to be stabilizing.  However rate, which always lags, is still continuing to deteriorate. Transient trends feel firmer with more late-breaking business, while group business remains very soft....That said, all we are seeing is stabilization. There are no signs of any turnaround."


The comment starts out strong; "signs everywhere" but only of "some stability".  Of course, it ends with the wet blanket of no turnaround.


So what's left of the trade?  Valuation would say not much.  On our numbers, the enterprise value is trading at almost 10.5x 2010 EBITDA.  While sub 9% pricing on the bond deal could be a small catalyst, evidence of an actual recovery may be the only real catalyst.  Otherwise, 10.5x looks a touch pricey to us.


Our new 2009 numbers are $0.60 and $755 million in EPS and EBITDA, respectively, and $0.46 and $720 million for 2010.



SBUX - New Ads




SBUX - New Ads - SBUX AD




Consumers and companies alike are going through profound changes based on complex and challenging economic realities. Everybody is looking for value, but value doesn't just mean what's cheapest; it's about what's best for consumers, their families, their communities and the world around them.


Providing this value and living by our ethics is precisely what Starbucks has been doing for nearly 40 years and today we are poised to launch an extensive, long-term campaign to tell that story. As a loyal customer, we want to thank you for being an important part of our story and invite you to be among the first to discover the new campaign


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