"A striking improvement in the rate of decline"

Yale University economist Robert Shiller today on Bloomberg TV


As you can seen from the chart in this post, Mr. Shiller's comments on April numbers are a few months late.  The real striking improvement was back in February 2009, when home prices first began to fall at a lesser rate.

The Case Shiller index decreased 18.1% year-over-year in April, following an 18.7% drop in March.   A Survey of Economists predicted the index would drop 18.6%.  The peak decline was in January when the index declined 19% - the most on record. 

On the margin, things have gotten better for housing as the rate of decline in home prices is slowing.  While the price of a home is declining at a lesser rate, however, it does not make it easier for consumers to make mortgage payments.   As evidenced by the news on delinquency rates, we are not out of the woods yet.  It was reported today that delinquency rates on the least-risky mortgages more than doubled in 1Q09 from last year. 

That being said, the April Case Shiller numbers suggest we are at least continuing to head in the right direction.  Consumers should find some comfort in knowing that the value of one of their biggest assets, their home, is not declining at an increasing rate.  The real comfort and confidence will come, however, when these values begin to appreciate, and unfortunately, that may still be a long time off.


Howard W. Penney

Managing Director





I'm not making the case that City of Dreams is off to a rip-roaring start.  Mass visitation has been disappointing and up until this past weekend, the VIP hold percentage was actually negative.  However, with the maturation of the Macau market and Beijing pulling the Mass visitation strings, new properties need time to ramp. 

The good news is that there are signals that the property may indeed already be ramping.  The big VIP push was not initiated until this past Friday and indications are that the property held very well.  On the Mass side, CoD only began advertising in China mid-month.  Thanks to a Signal No. 3 Typhoon that hit the area this past weekend, visitation was probably not at the level expected.

On the cost front, margins may ramp faster than expected.  Labor costs look as though they may come in lower than expected, partly due to a higher percentage of part-time employees.  Any positive commentary in this regard will be a positive catalyst.

MPEL management will issue a detailed press release on Thursday pre-market.  Considering the very negative sentiment surrounding the name and City of Dreams, any signs of a ramp discussed in the release will likely be taken favorably.

A month of data is not significant; it is still early.  Structurally, we see no issues and believe that our $180 million EBITDA estimate for 2010 is reasonable.  While $180 million is not very good next to a $2.1 billion price tag, whisper expectations are lower. 

Here are some observations from our Macau trip last week that may be discussed by management in their 7/2/09 press release.

  • Negative VIP hold % (-0.5% to -0.7%) due to 5-6 players plagued the property, not widespread through the casino - not sustainable
  • Margins should be better than expected - probably due to part-time staffing and lower wages - 75% of what they expected
  • Hard Rock doing 60% more per position than CoD casino
  • Rolling Chip (VIP) launch was Friday night (6/26)
  • The go ahead for advertising in China was given on 6/24 - only 13% of customers are from mainland, needs to be 30%
  • Have not gotten the mid-Mass business yet - advertising in China will help
  • Signing 2,000 Mass customers into City Club database daily - faster pace than the Venetian after 3 weeks
  • Former Venetian marketing people running the database
  • Generally positive commentary from competition

Confidence Has Peaked!


"Confidence has peaked!"    
 Early Look - 6/12/09

 On 6/12, I wrote the Early Look for Keith and the title was CONFIDENCE.  Our call on consumer confidence is a very important call for Research Edge, given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did (see chart below). As always, what matters most to our macro model is what happens on the margin (red circle on the chart represents the 1st sequential deceleration).

Today, the Conference Board Consumer Confidence Index in June now stands at 49.3, down from 54.8 in May.  Most Economists surveyed had projected confidence would be virtually unchanged at 55.0 or slightly better.

Coming into today's confidence reading, we are short both Consumer Staples (XLP) and Consumer Discretionary (XLY) - the only time in 2009 that we have been short both ETF's.  The underperformance in consumer related names is pronounced, despite yesterday's move.  The Consumer Discretionary (XLY) has been underperforming on an absolute basis for the past month, and is down 0.7% over the past week while the S&P 500 is up 2.9%.   We have been citing the continued job losses, the increase in interest rates and higher gas prices as three reasons for the underperformance, and the consumer confidence number today is the river card.  

The decline in confidence is suggesting only the obvious, the reality that we are not in a depression, but the "Great" recession.  The stock market is up significantly from the lows, lessening consumers' pain, but an unemployment rate that is headed to 10% or higher will definitely continue to cause some angst. 


Howard Penney

Managing Director

Confidence Has Peaked! - Confidence2

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SBUX - Commenting on Competitor Comments

In the past I have paid for the CREST data and found it to be completely unreliable.

Here is an example of how misleading the data can be: Taken from the MS SBUX note ... It says that based on CREST data "For CDRs: the Bar & Grill fared best in May, posting +3% total sales growth, likely the beneficiary of increased discounting/promotions in the space (think Chili's, Ruby Tuesdays, Applebee's & TGI Fridays)."

We know from Malcolm Knapp, however, that May comparable sales trends for the Casual dining industry declined 6.7%. Mr. Knapp's data is much more reliable as it comes directly from the companies and not from consumer surveys. What the consumer says is happening (NPD Crest data) and what is actually happening within the four walls of a concept (Malcolm Knapp data) may be completely different.

The MS note highlights that May CREST data showed a significant YOY decline in total gourmet coffee/tea sales. Gourmet anything is not doing well in this economy, that we know! First, I again question the validity of the data. Second, although MCD's McCafe sales are not included in NDP's gourmet coffee/tea numbers, such a falloff in category trends would impact all major coffee players. Why is this not a negative for MCD too? Consumers are trading out of gourmet coffee to go to MCD? Or are they trading out of "gourmet coffee," which will impact everybody and not SBUX in isolation.

Additionally, there are 102 different chains included in NPD's gourmet coffee/tea category survey so there can be lots of noise in the data. If you would like to see the list of companies included, please call or send an email and I will send it to you. It's important to note that Dunkin' Donuts and Tim Hortons sales are not included in NPD's gourmet coffee/tea numbers but rather in its Donut category.

My SBUX "grass roots survey" indicates that May same-store sales on average were flat to -1%. This compares to our previous survey indicating that March same-store sales on average were flat to -3%. As I said in March, these numbers are so good I don't believe what I'm seeing. Naturally, I provided a haircut to the numbers, but that would still put SBUX same-store sales at down 3-4% versus 5-7% in March (please refer to my June 19th post titled "SBUX - GRASS ROOTS SALES SURVEY FOR MAY 09" for more details).

A quick comment on SBUX from Keith McCullough: $13.60 is good support with the backstop of intermediate TREND line support = $12.85.




The March-May period Macau unemployment was 3.5%, down 0.3% from the February-April period, according to Macau's Statistics and Census Service, Xinhua News Agency reported Monday.

Unemployment for the March-May period was 0.6% higher than for the same period in 2008, according to the report citing the Statistics Bureau.  All sectors, except for local manufacturing and transport storage and communications, saw improvement in the unemployment situation, according to Xinhua.



The Health Bureau reported two more imported cases of Influenza A (H1N1).  The first case was that of a twenty-six- year-old Macau resident who recently returned from Guangzhou, the second was a nine-year-old girl and Macau resident who lived in Hong Kong. 

The number of confirmed cases in Macau has now risen to twenty.



We met with Great Canadian (GC) & Gateway management and visited several properties in the Vancouver marketplace on June 24th.  Overall, we walked away more positive on GC and continue to believe that the stock can continue to work on the back of several second half catalysts.  Below is a summary of our takeaways from the trip.

  • Economic impact has not worsened since 1Q09
  • Cost reductions are continuing
  • Competition remains rational and marketing spend is ROI focused
  • Gateway's leverage issues certainly are benefitting GC
  • Construction disruption at River Rock is less severe than Jan/Feb
  • Hastings ramp continues to be slower than expected

The market remains stable and is potentially improving.  Going forward there are a number of positive catalysts including:

  • Canada line opening & relocation of the bus hub
  • Opening of expansions at View Royal & Georgian Downs in 3Q09
  • Easy comparisons in 4Q09
  • Benefit from the Olympics in 1Q2010 - Hastings will close for 17 days, and Edgewater will have pedestrian access only, however we expect GC's other properties to benefit


The British Columbia (BC) gaming market is a duopoly between Great Canadian ("GC") (41% market share) and Gateway Casinos (38% market share).  Gateway was acquired by Macquarie & Crown Entertainment in November 2007. The transaction put a substantial amount of leverage on the company which will likely require a restructuring in the near future.

For the TTM ended March 31, 2009, the BC gaming market grew 1.5%.  However, when we strip out the new community gaming centers ("CGC") which opened during this period, the opening of Starlight Casino, and the addition of slots at Hastings, the market actually contracted approximately 4.5%.  In 2009 & 2010, there are only a couple of CGC's opening and no planned expansions.  The BCLC is forecasting that BC gaming revenues will be flat to slightly down in 2009.

Assuming that there is normal weather this winter, the 4Q comparison is easy given the severe weather in 4Q08.  The Olympics should provide a temporary benefit to gaming revenues in 1Q2010. Already, the infrastructure construction ahead of the Olympics seems to be benefitting the Vancouver economy.  It's unclear what the impact will be post Olympics in 2H2010.  Will the economy take a leg down once the infrastructure spending ends?  Will the additional real estate built for the Olympics further depress pricing?  Will the spotlight of the Olympics stimulate population growth?


Great Canadian Gaming Takeaways

Economic Impact:  Since GC gave guidance in 1Q09, there hasn't been a material change to the trends in the BC market.  It appears that things have remained stable, and even improved from Jan & Feb 2009, as the fear of a huge downturn has subsided.  The infrastructure work related to the coming Olympics is surely helping employment figures in the greater Vancouver area.

Cost cutting:  Cost cuts will continue to have a meaningful beneficial impact on results through 2009.  The main cuts include reduced operating hours, staff reductions (both on-site and at corporate), and supplier renegotiations. We believe that these changes are sustainable until there is an improvement on the demand side to justify longer operating hours and staff.  The deferred capex (like the hotel at River Rock) can come back when the demand is there.

Ron Baker: the controversial shareholder/ consultant is actually being quite helpful in instilling discipline to the organization.  We personally think that the scrutiny by the sell-side of the transaction was overblown last quarter.

River Rock:       

  • Construction disruption has definitively subsided to a minimum. There was noise in the entrance area, and the facility felt a lot smaller, but otherwise the impact was minimal especially compared to December & January.
  • Preparing to shut down the buffet for a few weeks. However, it has already been downsized and impacted by the construction.
  • Canada line will be complete by Labor Day, but the grand entrance with the curving escalators won't be complete until November 2009. There is also a hub bus stop being moved right near the Canada line stop which should bring more traffic to this location.
  • The convention business is holding up better than expected as many companies are keeping conferences local.
  • Also getting some "staycation" business on the weekends.


  • Still one of the most challenged properties in the GC portfolio. Ramp up from slots installed in Aug 2008 is still disappointing.
  • As background, the location was and still is highly contested from the surrounding residents. The bylaws in the area prohibit any signage, making it difficult to find the property. The facility is also prohibited from serving alcohol anywhere but designated eating/ bar areas. The opening of Grand Villa shortly after the slot opening didn't help either.


  • Dawson's Creek CGC & Nainamo are the two properties seeing the greatest impact from the economic slump. View Royal is holding up surprisingly well as are card rooms in Washington.
  • 4Q09 will benefit from easy comps, opening of the Canada line, and the opening of the new gaming additions at View Royal & Georgian Downs
  • 2Q09 Earnings tentatively set for August 10th


The Competition

River Rock, Boulevard, Starlight, Grand Villa, Hastings, and Edgewater are all located within (16 miles of each other)


  • Grand Villa is a very nice property, however, the question remains if the product is "too nice" for the demographics - ramping slower than expected, although since it has lapped the one year anniversary of the smoking ban that went in effect in April 2008, revenues and EBITDA are on an upward trend
  • Focused on cost cutting (enforcing early outs, ROI focus on marketing initiatives)


  • Seems to be doing really well from a revenue standpoint. They have been aggressive on the marketing side, going after the lower end grind customer. Unclear if they are buying the revenues or if the marketing programs are adding to the bottom line. Either way, Hastings at least is feeling the heat.

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