Winners Prepare

"It's not the will to win, but the will to prepare to win that makes the difference."
-Bear Bryant
Paul William "Bear" Bryant was one of the best American college football coaches of all time. While it's almost a household phrase in any winners thought process today, he's the author of this incredibly simple game plan as well: "Don't give up at halftime. Concentrate on winning the second half." Today is day 1 of the second half of the 2009 investment season. No matter where you go this morning, here we are.
Many people in this business spend the majority of their time reacting. Running their portfolio or their business is a constant fire drill. From Bush to Obama, Washington takes the latest cake in being the poster child of running a country this way. That's not risk management. It's what losing team's do. Bryant's "long term" investment model (25 years as Alabama's coach winning 6 National Championships and 13 Conference Championships), is much more of an American leadership template that I can buy into.
While being proactively prepared may sound redundant, it's as simple as simple does. It takes discipline, focus, and objectivity. Rinse and repeat.
The Chinese government continues to impress with their proactive plan to maintain economic growth while stymieing inflation. This morning we are waking up to the 4th consecutive monthly acceleration in Chinese Producer Manufacturing (PMI), and the Chinese stock market hitting yet another year-to-date high as a result.
The Shanghai Stock Exchange Index's close above the 3000 line will undoubtedly attract the bubble watching flies. I took the ball right up the middle on Barron's Alan Abelson pretty hard a few months back for getting negative on the Chinese growth story. He has been predictably quiet on the topic ever since. If we can get him and his editor to slap a China Bubble on the front page of Barron's in the coming weeks this will almost assure us of seeing higher-highs in Chinese stocks from here.
As the Chinese sell US Treasuries and leverage their newfound global economic power to diversify their risk, plenty a pundit seems readily available for a CNBC interview to tell you why the US Dollar won't be affected. Rather than depending on hope based rhetoric, we suggest you continue to keep your eyes on the field that's in front of you. The rear view club's track record of accurately predicting tail risk is what it is - it's on the loser's side of this increasingly interconnected game of global macro investing.
At the 2009 halftime, the stock market score is as follows: China +65% vs. USA +2%. If you're more of a "long of" liquidity and "short of" financial leverage type of investor, you're using the Nasdaq's +16% 1st half score for the US instead, and I have no qualms with that accounting. It's marked-to-market, and you've been winning with that strategy.
How are the Chinese getting this done? I think their proactive plan has been simply stated - they want to be long 3 things:
1.      Liquidity

2.      Safety

3.      Returns

As you proactively plan for today, tomorrow, and the quarter ahead, I think you should look at every position in your portfolio and ask yourself if they subscribe to this simple investment plan. And when you get to #3, I mean unlevered returns - not the kind that my ex-colleagues in Private Equity Inc. are going to have to deal with explaining away post their field goal try with Great Depression fear mongering. In an investment landscape where long term cost of capital is going to continue to increase, you do not want to be long financial leverage.
We want to be long the 3 things that China's central banking head, Zhou, outlined on Sunday night. We want to be long the economic leverage associated with accelerating Chinese demand. We want to be long the operating leverage embedded in a great management team's cost structure.
We do not want to be "long of" financial leverage.
On the US side of our Asset Allocation Model we continue to express these macro views by being long QQQQ (Nasdaq), XLV (Healthcare), and XLE (Energy).
Immediate term TRADE support for the Nasdaq is 1.5% lower than the 1st half of her 2009 close, so you do have a larger margin of safety there versus being choke full of financial leverage in an index like the Dow Jones. In sharp contrast to the liquidity laden Nasdaq, the Dow remains one of the worst performing major country indices in the world for 2009. And for good reason.
Your will to "prepare to win", will undoubtedly decide your team's success in the next 6-months. Stay in your crouch and keep those chin straps tight. This will be a full contact affair.
Best of luck out there,


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

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 British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.



"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

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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

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.

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