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MACAU DAILY MONITOR

CHUI SAI-ON IS TO BE THE NEXT CHIEF EXECUTIVE scmp.com

Macau's future leader gathered 286-out-of-300 nominations from the Election Committee members and will be the sole contender of the chief executive race.  He pledged to work hard and work with Macau residents to achieve Macau's "long-term prosperity and stability".   Two other residents submitted forms without any nominations. 50 nominations are required to run in the July 26 election. 

 

DELTA FORUM FAILS TO LIVE UP TO EXPECTATIONS scmp.com

The Delta Forum initiative that started in 2004 has failed to aid regional integration between Hong Kong, Macau, and nine mainland provinces.  Official figures show more than 15,000 collaboration projects valued at over 1.6 trillion yuan were signed under the co-operation framework between 2004 and this year in the transport, environmental protection and other sectors. 

Experts doubt the credibility of these numbers because most of the contracts were merely collaboration frameworks, with a rough estimate of economic output in the coming decades.


SBUX VERSUS MCDONALD’s – The debate rages on

I still believe that there is a significant catalyst coming for Starbucks when the world realizes that McDonald's McCafe is not taking significant share from SBUX.


The other night, not knowing I was an analyst (not that it matters), an acquaintance of mine was talking about "investing". So I asked him about McDonald's and if he had tried the new coffee drinks. He said yes and that he was very disappointed and it's not likely he will have another one. The McDonald's media blitz is clearly stimulating significant trial, but if they don't have the products engineered perfectly, that all its going to be - a onetime purchase.


The amount of media that McDonald's is throwing at coffee is coming at the expense of other parts of the menu. In the areas where they have reduced media spending, it's only natural that the trends for those products will slow. Is the coffee news enough to keep the overall sales growing? Coffee is not a core competency for McDonald's and there is a big risk that McDonald's is too focused on coffee! If June is like May, McDonald's will have a hard time explaining away a soft comp. This will be good for SBUX!


Given my friends response I sought out the bloggers to see if he the exception or the norm. All of the following comments are from the blogs debating the issue:


If anything, I think the McCafe launch has made people appreciate the taste and quality of Starbuck's beverages. I remember the first time I tried the McCafe Mocha - when I asked how many shots of espresso was in it, the person working at McDonalds didn't even know what espresso was. Starbuck's specialty is coffee and good, quality beverages. McDonalds specializes in... Sandwiches! The companies should stick with what works best for them.
The companies should stick with what works best for them." Unfortunately, Starbucks doesn't know how to do that and has alienated many a customer with decisions such as not brewing decaf and bold after noon etc. I don't really see a McCafe hurting sbux so much as the economy and the fact we raised prices during a recession....ummm...can you say stupid move


Had a few customers comment that their experience was not good at McD's. Cheaper price but less quality beverage. As for trends, seeing lots of iced coffee sales rather than iced lattes or blended beverages. I think the 1.95 price point is good for people. My opinion is that McD's can't really compete right now with espresso. If they get a good iced coffee, then it could compete. Their current iced coffee is weak tasting. Sbux breakfast sandwiches don't compare. Not fresh enough. I don't eat fast food breakfast for health reasons. Personally, I think it is dangerous for Sbux to compete with fast food... FOOD. The less like a coffee house and focus on drinks means less quality of beverages and service speed.


I'm not a SBUX employee, I'm a regular customer. The McDonalds rollout hasn't affected my consumption patterns one bit. I'll go to McDonalds if I want a fast-food hamburger. The McCafe marketing plan just sounds like a clumsy attempt to get some of Starbuck's and Dunkin Donuts' market share.


Truthfully, having a mcd's ten feet away has NOT affected my store. They post signs pointing directly at my store for their mccafe' and yet...we still get THEIR employees buying our coffee. We've had customers go there and get a drink, only to dump it out and get a drink from us.


Ugh, I had a vanilla latte at McDonald's for the first time yesterday. So gross. It tasted exactly like the vending machine coffee I used to get in college. This is about right, considering it was "made" by pushing a button.
We have a McDonald's across the street from my store and I have made it a point to ask many of our regulars: "Have you tried any of the McCafe drinks? What were your thoughts?" I also tried the iced mocha myself. The results were simple... You pay for what you get. Argue the details all you want. The fact remains that value is up for the customer to decide.


We have three McDonalds within a five minute drive of us (including one within four blocks) and our trends are:
-increase over target sales by at least 25%
-increase in average check by almost a dollar
-increase in customers asking us at the window if we can throw away their nearly-full McCafe cups after we hand them our coffee and I believe that says all I need to know about it.


I'm seeing a really interesting effect because our store is just a row of parking spaces away from a McDonald's. We're getting customers who come in saying they tried the McCafe and were thoroughly disappointed. A couple of days ago they weren't able to make any iced coffee for some reason and I actually had a customer tell me they suggested they come to our store! I had another customer who said they got mocha there, took a few sips, and drove right over to our store to get something that didn't taste awful. Also, I'm seeing more customers recently who are totally unfamiliar with anything Starbucks. I'm wondering if the McCafe got some of those people who don't normally drink coffee interested in coffee drinks, tried it, left disappointed and decided to compare it to Starbucks.


I agree with the comments that it has not hurt my SBUX at all and I would argue that it has helped exponentially. My store has been in the same location for over ten years and it has NEVER seen business like we are experiencing now. Our store is up 25% in sales over last year alone. We have a DD right next door with a drive-thru (my SBUX has no drive-thru thank god), and there is a McDonalds 2 minutes down the street. I agree that McDonalds has done us a GREAT service in drawing attention to coffee. Unfortunately for them, once people try both, they then realize that you DO get what you pay for and maybe paying a little more for a perfectly customized beverage is a better value for their money. People are certainly entitled to their opinion and if they like McD's better, then good for them... I just don't see the masses embracing their coffee products. I continually express my belief that the draw to SBUX is also the feeling that people get when they carry around a SBUX cup. It sends a subliminal message, "I'm successful, I'm trendy, and I'm sophisticated". Anyone who thinks otherwise is not in touch with the human psyche.

 


UK MORTGAGES

Floating lower, for now

In the UK, where fixed rate loans of durations over 10 years are not typically available, floating rate and variable mortgage products comprise a significant portion of the total. According to the Council of Mortgage Lenders, fully 49% of total mortgage debt in the UK is either variable, discounted variable (a variable rate with a  teaser) or a tracker, which follows the BOE rate in lock step.

As such, the current low rate environment is having a significantly larger impact on the UK consumer than their US counterparts. National Statistics Office retail price Index levels reported today registered at -1.07% on a year-over-year basis but at +1.58% Y/Y with mortgage payments excluded from the basket (see chart below).

Clearly the impact of changing rates will be felt earlier and harder by consumers in the UK than in the US.

Andrew Barber

Director

UK MORTGAGES - ab1

UK MORTGAGES - ab2


Daily Trading Ranges

20 Proprietary Risk Ranges

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Squirrel Hunting: SP500 Levels, Refreshed...

Barber and I have re-run the math on today's intraday price moves enough times to drive myself squirrely. Good thing AB has a massive bag of Costco nuts on his desk!

When the US Dollar was down on the open and stocks REFLATED, that made sense. Intraday, the US Dollar has rallied, but remains down -0.57% at the time of this note. At the same time, all of the REFLATION trades have collapsed, leading the US stock market to its intraday lows - what gives?

Sometimes the answer is I don't know. Sometimes I just call it squirrely. All of the time, real-time prices end up discounting something that I can't quite see, yet...

Are we starting to discount the end of the inverse correlation between REFLATION and the US Dollar? At this juncture, that would be a very premature conclusion to make - we don't have anywhere near the amount of days or volumes in the data series to confirm anything other than what you see in front of you today. That said, extremely high r-squares like this aren't perpetual. When consensus hits its crescendo, correlations start to unwind.

Below I have outlined my immediate term TRADE line of support for the SP500 at 915 (dotted green line). At the time of my whacking these keystrokes, the SP500 is trading below that. In context, a drop down to the 904 line would be a 3-standard deviation move on the short term duration model I have been using. Those are hard to achieve - but when they do, something squirrelly is brewing.

From here, the market could go to 952 in a straight line and I wouldn't call that a squirrel. That's my immediate term line of upside resistance.

Confused yet? Have a nut.

KM

 

Keith R. McCullough
Chief Executive Officer

Squirrel Hunting: SP500 Levels, Refreshed...  - cos


US Housing - A Disconnect?

Finding a bottom always seems easy, in hindsight....

As measures by the NAHB Housing Market Index (HMI) home builders remain cautious and concerned about prospects for the housing market, but that was yesterday;  today's key data point was Commerce Department numbers showing that U.S. builders broke ground on more houses than forecast in May, another sign of a "bottom" that the manic media has leapt on.

Since the end of Q408, our call on housing has been that it would bottom in 2Q and today's news provides further validation for our thesis.  The 17% month-over-month increase in housing starts to an annual rate of 532,000 followed a 454,000 number last month, handily beating both consensus and our expectations.  Last month we described the housing start numbers as an industry "acting rationally". This month's number is not strong enough to indicate that home builders are acting irrationally, but one has to wonder if the demand is really improving. 

The divergence between starts and completions has narrowed by 35% from the high in November of last year -but at 280 thousand units the potential inventory overhang is still both significant and ominous.

While government tax incentives are helping to bring in first time buyers, the bulk of the benefit is in the rear view mirror.  Last week average 30-year fixed mortgages jumped 30 basis points to 5.6% percent, (the highest since November 26, 2008) which suggests that the trends could slow as we head into the summer.  At 5.6%, mortgage rates are 75 basis points higher since April, when the rates were 4.8%. Meanwhile, the Mortgage Bankers Association said total mortgage applications fell 7.2% last week. 

With unemployment at a 25 year high and likely headed higher more consumers are likely to hold off on purchases of big ticket items and the savings rate is on the rise.  The housing market has bottomed for now, that is for sure.  The next move on the margin is less clear, as there is enough cold water to throw on an accelerating rate of improvements.

Howard W. Penney

Managing Director

 

US Housing - A Disconnect? - cha1

US Housing - A Disconnect? - cha2


PNK: SUGARCANE BAY OPTION > SUGARCANE BAY

As reported by the American Press, CEO Dan Lee intimated that PNK may begin construction of Sugarcane Bay by August.  The Lake Charles sister property to L'Auberge is now expected to cost $407 million, up from $350 million.  The improving credit markets were cited as the catalyst to resume construction.

Now, there is a lot to like about PNK.  Lumiere Place is ramping faster than expected, no doubt aided by the removal of the $500 loss limit in Missouri.  The company maintains significant exposure to Louisiana which has been the strongest performer among the gaming states.  The valuation at about 6.5x EV/EBITDA is reasonable and the FCF yield of almost 15% is attractive.  Last but certainly not least, PNK management has shown uncharacteristic restraint in terms of capital deployment, until recently.

My issue is not that Sugarcane Bay will be a disaster.  It's just that levering up to build at 8x EBITDA (maybe even higher if there is cannibalization of L'Auberge), when the incremental cost of borrowing will fall in the 7-10% range, doesn't seem to make sense.  We calculate only $0.09 in free cash flow accretion per share from Sugarcane Bay.  PNK could generate that level of accretion from the repurchase of only $50 million worth of stock.  PNK's cost of borrowing is going higher anyway - making the 15% FCF unsustainable - but pursuing Sugarcane Bay will expedite and elevate the hike.

PNK: SUGARCANE BAY OPTION > SUGARCANE BAY - pnk sugarcane bay 

Given the higher incremental cost of capital, exercising any development options would seem to detract from the company's value.  A story of harvesting cash flow and open development options seems like the better story for now.


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