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The chart below shows our forecast for slot sales into new and expanded casinos in North America.  As we've been saying for awhile, the picture isn't pretty.  Fortunately, replacement demand is poised to bounce off the bottom as casino operator balance sheets have improved dramatically in the past few months.  See our 05/15/09 post "IGT: MGM, CREDIT MARKETS, AND REPLACEMENT DEMAND".  Anecdotally, we've already heard that certain properties are accelerating replacements.

REPLACEMENT/NEW: A TALE OF TWO DEMANDS - domestic slot shipments 

Changes from our last new casino and expansion update are as follows:

  • 2009: ~33k up from 20k (early 2010 shipments moving to late 2009)
  • 2010: 14k down from 24k
  • 2011: 14k - does not include possible openings of Aqueduct ( up to 4,500 slots), a Lakes (LACO) casino in OK (1,200), and potential temporary facilities in MD and KS (permanent ones won't open before 2012)

The following table lists all of the new casinos and expansions opening through 2011:

REPLACEMENT/NEW: A TALE OF TWO DEMANDS - New and expanded casinos

Retail First Look: 7/1/09


This situation in Honduras is escalating to the point where it can't be ignored as it relates to impact on retail.  In addition to the direct situation in Honduras, it's also noteworthy that Nicaragua and El Salvador are closing border routes as a pressure tactic to return Zelaya to office. 

In other words, despite reports from Gildan that the political limbo in Honduras has not affected operations, we're beginning to think otherwise. While most state owned operations are removed from direct conflict in San Pedro Sula on the northern coast, the closing of border routes in El Salvador and Nicaragua have significant ramifications. Companies such as VF Corp. and Hanesbrands with production in nearby countries typically ship to Honduras for export to the U.S. - this disruption is forcing companies to think of alternative and costly fixes (i.e. air freight). While production in Honduras may not be impacted directly, sky rocketing geo-political risk in the region will inevitably affect the cost of future business. With both Gildan and Fruit of the Loom production highly concentrated in Honduras, further escalation of the current situation may be net positive for Hanesbrands as reflected in the 7% positive divergence over the past 3-days.

Here are yesterday's developments...

  • The United Nations General Assembly has approved a resolution calling for the reinstatement of ousted Honduran President Manuel Zelaya.
  • The US has supported the UN resolution
  • Spain has called on other EU countries to withdraw their ambassadors
  • World Bank president has "put a pause" on its lending to Honduras and is "working closely with the OAS and looking to the OAS to deal with its handling of the crisis under its democratic charter".

The possibility of swift economic sanctions, including a temporary suspension of CAFTA trade policy, cannot be dismissed.  The US government appears to be willing to follow the UN's lead, and the UN in turn is taking its cues from the OAS, which is currently under the sway of Venezuela, Cuba and other allies of the Zelaya administration. We simply do not believe that the current administration has the will to fight UN/OAS consensus on this matter.



Some Notable Call Outs

- Not only are international brands and retailers trying to grab cheap rents in the US, but they are also building large fan bases on Facebook.  Using the social networking tool to track the most popular brands/companies as measured by the number of fans, we discovered that international brands are well represented in the top 10. The list includes: 1) Adidas Originals, 2) Victoria's Secret, 3) Nike, 4) Converse, 5) Victoria's Secret PINK, 6) Zara, 7) PUMA, 8) H&M, 9) Adidas, and 10) Burberry.  As Facebook continues to grow across the globe, we suspect that this list will evolve even further.  Interestingly, Adi's "Originals" sub-brand ranks higher in popularity than Nike. While still early in exploiting social networking to drive consumer awareness and ultimately market share, it appears from this small sample that US based companies are lagging their international competition.

- The death of Michael Jackson remains top of mind and this has retailers scrambling to meet demand for the pop icon's albums. Reports suggest that Amazon.com has sold more Michael Jackson albums since his death than it did in the prior 11 years combined! Given the weakness in the packaged media category and dramatic reduction in floor space allocated to cd's over the past 5 years, we suspect this phenomenon will provide a much-needed, albeit temporary boost to those that still sell music.



Zach's overview of items you're unlikely to find in the general press.

- Sport Supply Group on the acquisition front - Sport Supply Group, Inc. has acquired certain assets from Gus Doerner Sports, Inc. of Evansville, IN. SSG acquired the rights to Doerner's Team Sports Division which caters to high school, college and out of school sports programs in southern Indiana. Last week, Sports Supply Sport acquired substantially all the assets of Webster's Team Sports of Pompano Beach, FL. This transaction affords SSG the ability to expand its coverage of an important state while leveraging the pre-existing infrastructure and support systems already in place in that region. <sportsonesource.com/news>

- Dick's Opens in old Joe's Store - Dick's Sporting Goods Inc. will open a store in a former Joe's Sports & Outdoor in Hillsboro, OR. The store will be the second for Dick's SG in Oregon. The Hillsboro location marks the first Joe's store to be refurbished for another company. <sportsonesource.com>  [McGough: Hillsboro is the core of where some key Nike executives reside. Something tells me that the Swoosh will be disproportionately represented at this store]

- Eddie Bauer auction set - Eddie Bauer Holdings Inc. won bankruptcy court approval to sell its assets at an auction next month. At a joint court hearing held simultaneously in Wilmington, Delaware, and Toronto, where the company's Canadian division is in bankruptcy, two judges approved Eddie Bauer's request to hold an auction for its assets on July 16. <sportsonesource.com/> [McGough: Given all the interest in this name pre-filing, I'm interested to see who really steps up to the plate. That said, go and ask anyone under the age of 25 if they know who Eddie Bower is....]

- Billabong selects a global sourcing company - Billabong has selected NGC's e-PLM(r) for Product Lifecycle Management and e-SPS(r) for Global Sourcing and Visibility. NGC's software will be implemented worldwide as a strategic PLM and global sourcing solution for Billabong across all of the company's regions and brands. Billabong selected NGC after a detailed and rigorous evaluation of the industry's leading PLM vendors. "We chose NGC based on the functionality and ease of use of their solutions, as well as NGC's deep understanding of the fashion and apparel industries," said Mike Savage, General Manager of Product Development, Billabong International Limited. <globenewswire.com/news>  [McGough: As capacity frees up again at the plant level (a major theme of ours for 4 months), you're going to see more of these offensive moves in investment in software, systems and partnerships.]

- Nike launching cross-trainers inspired by the originals - Twenty years after Nike entered the cross-training category with the original Air Trainer - made famous by Bo Jackson's classic "Bo Knows" commercials - the company is prepping for the next evolution with the July 1 debut of the Trainer 1. Designers went back and reexamined the original shoe for inspiration and reengineered the design to incorporate the company's latest technological innovations. High-top and low-top versions of the $90 shoe are expected to drop at sporting goods and athletic stores later this year, along with limited-edition versions of the shoe in a variety of colorways and material makeups. <wwd.com/footwear-news[McGough: This is the benefit of having over 30 years worth of success from which to draw upon. When a shoe company reaches into the closet as a starting point for new product, the incremental ROI is materially higher than starting from scratch]

- Amazon and Blue Nile cut off affiliates in more states over taxes - Blue Nile today joined Amazon in ending referrals from Rhode Island web affiliates because of legislation that would require collecting sales tax. Both retailers recently made similar moves in North Carolina and Amazon today cut off affiliates in Hawaii. <internetretailer.com>  [McGough: This issue is escalating, and worth spending some time on - which we'll be doing.]

- License deals in China - Conflicting reports are circulating in Europe and in China about Pierre Cardin license deals in China. Earlier this week, it was reported that the French designer was set to sell all his product licenses and the brand to partners in China. This has since been denied, but it has been suggested that the designer is close to finalizing 32 footwear deals with its existing partners Jiansheng Trading and Cardanro in a €200 million ($280 million) deal. This deal is said to include the Maxim's brand.<licensemag.com> [McGough: People talk about more us direct investment in China, but I think more of the opposite. This licensing deal is a sign of what is yet to come, with China buying/licensing foreign content]

- Large Indian retail company terminates a JV - Pantaloon Retail India Limited (PRIL) has decided to terminate its joint venture (JV) with Planet Retail Holdings. The company has also terminated its JV with Blue Foods, which runs restaurant chains such as Bombay Blue, Noodle Bar and Copper Chimney. "Planet Retail has two businesses, which is apparel and sports. We are running the sports business and it has become a wholly-owned subsidiary. That's why the JV with Planet Retail is being terminated," Kishore Biyani, chief executive officer, Future Group, told Financial Chronicle. PRIL had 49 per cent stake in Planet Retail Holdings. <indiaretailing.com>

- The FitFlop Phenomenon - Topping the list of most-searched sandals on AOL is FitFlop. The footwear phenom surpassed a slew of globally-recognized brands proving that these muscle-toning, pain-relieving, posture-improving shoes are on everyone's mind. The FitFlop has received the seal of acceptance from the American Podiatric Medical Association. The latest FitFlop collection for Summer 2009 is an Italian-designed range of varying styles including a slide for those who don't like anything between the toes. FitFlops' patent-pending microwobbleboard(TM) technology midsole increases leg muscle activity by approximately 10-12% with each step. They help improve posture, tone calves, thighs and gluteal muscles. FitFlops have also been reported to provide relief from plantar fasciitis, heel spurs, chronic back pain, sciatica, osteoarthritis, scoliosis and countless other conditions. FitFlops range in price from $49.99 to $59.99. <sev.prnewswire.com/retail[McGough: Not good for Crocs. Though the dark horse beneficiary might be Skechers.]

- M&S group beats the street with 2.9% sales growth - In the quarter U.K. sales were up 1.7% and international sales soared 15.9%. Sales growth driven by the store's 125th anniversary campaign, and the timing of the long Easter weekend. Clothing, a division that has been struggling in recent months, rose 1.4%, with improved performance across all areas of the business. <wwd.com/business-news>

- American Apparel's manufacturing facility full of illegal workers - Up to one-third of American Apparel Inc.'s manufacturing employees in Los Angeles may be working illegally, according to the U.S. Immigration and Customs Enforcement agency. The ICE has notified the company that 1,800 of the 5,600 workers in American Apparel's Los Angeles production facilities do not have the proper paperwork to legally work in the U.S. Unless these employees resolve the discrepancies in their work records they will not be able to continue their employment with the company. While this would result in a significant reduction in the firm's production workforce, American Apparel said it did not believe the decrease would have a materially adverse impact on its financial results, due to its healthy inventory levels and manufacturing capacity. <wwd.com/business-news>  [McGough: Oh the irony that American Apparel has such a cult following with the 'anti-sweat shop' purists, and yet it overlooked such a basic component of making 'American Apparel in America.' That, of course, is having the goods made by people that are legally allowed to work here.]

- American Apparel expanding product range with bedding - American Apparel has been a mecca of hipster clothes since it debuted more than 10 years ago. But how much longer can people continue to wear deep V-neck shirts, gold lamé leggings, and hot pants? The company seems to know that the demand for these products could wane, so they've been adding new items to their stable lately. First it was butt-less tights, then scrunchies, and now the company is selling sheet sets.  <thefrisky.com>

Retail First Look: 7/1/09 - American Apparel Image

- Gap stepping up advertising with new agency - Just like it did this year with Old Navy, Gap Inc. appears ready to crank up the advertising on its Gap brand. Gap has been conducting an agency review and is likely to designate Crispin Porter + Bogusky for the Gap brand, according to sources. It's the same ad firm that does the campaign for the company's Old Navy division. There could be cost savings by utilizing the same agency for two divisions, though Gap is said to be pleased with Crispin Porter + Bogusky's quirky campaign for Old Navy, which features "SuperModelquins." Crispin Porter + Bogusky has a reputation for provocative campaigns. Meanwhile, management is gaining confidence in Gap brand products and wants to be more in front of consumers to reverse declining traffic and market share trends. In his first-quarter conference call, Gap Inc. chairman and chief executive officer Glenn Murphy acknowledged the need for increased marketing spend at Gap. The company plans a denim relaunch in August, to be followed by stronger marketing. <wwd.com/media-news> [McGough: I don't see how this can be a bad move. But Advertising only works if the product is there to back it up. The internal design talent is clearly lacking. But will new licensing deals (ie Stella McCartney and more to come) have the firepower to get this ball rolling?]

- Carrefour sets out a 3 year plan - Carrefour's chief executive, Lars Olofsson, on Tuesday disclosed a three-year plan to overhaul the world's second-largest retailer, achieve sizable savings and improve its image, which consumers have come to perceive as an expensive brand compared with competitors. By 2012, the company expects to achieve savings of $6.32 billion by improving the efficiency of its operations to generate higher margins, mainly in France, Italy, Spain and Belgium. The gains will consist of cutting operating costs and improving purchasing practices, and reducing inventory times by seven days. The transformation will require an investment of $702 million, and will entail one-off expenses. The company also underscored its resilience against the sharp economic downturn by disclosing first-half sales excluding gasoline should be slightly higher compared with the same period last year, and the increase in the second quarter of 2009 should be above that of the first quarter. Carrefour expects to focus on promoting its prices using advertising campaigns with clear price messages and price comparisons in a bid to attract more budget-conscious shoppers in the current downturn, according to the company. The retailer has already tested the strategy in Spain with success, logging market share gains and improving its image among consumers, Olofsson said. <wwd.com/media-news>

- H&M, Louis Vuitton and Wal-Mart at the top of survey - H&M, Louis Vuitton and Wal-Mart, respectively, are ranked as the world's most valuable apparel, luxury and retail brands this year, according to a study by consulting group Millward Brown Optimor. The group assessed global brands with the highest valuations in 17 sectors, from cars and coffee to technology and personal care. The study forecast the "intrinsic value" of 100 global brands by estimating their ability to "generate demand." Google was assessed as the number-one brand worldwide, worth $100.04 billion, followed by Microsoft, $76.25 billion; Coca-Cola, $67.63 billion; IBM, $66.62 billion, and McDonald's, $66.58 billion. H&M blew by Nike under Millward Brown's assessment to become the most valuable apparel brand, worth an estimated $12.06 billion, in a sector hit hard by the recession. The 62-year-old Swedish fast-fashion retailer was fueled by its offer of fashion, value and exclusive designer collections at affordable prices, such as a recent collection by Matthew Williamson and a collaboration with Jimmy Choo, which will launch a collection for women and men in about 200 H&M stores in November, said Pierre Dupreelle, a director at the brand consultant. Wal-Mart was the retail brand with the highest valuation, at $41.08 billion, a gain of 19 percent.  <wwd.com/business-news>

- New media/marketing company targets strictly college students - The estimated 13.6 million U.S. college students, ages 18 to 30, represent about $53 billion in discretionary spending, according to the 2008 Alloy Media + Marketing College Explorer study. Edhance, in beta test mode on this city's college populace, processes discounts back to students through affiliate programs with puma.com, target.com, Drugstore.com, skechers.com, avon.com, shopecko.com and Ice.com, a fine jewelry Web site. Discounts average about 10%. According to Edhance president Bjorn Larsen, the company has inked an agreement with a financial services company to automatically enroll more than 700,000 student credit card holders at back-to-school. Edhance has been quietly marketing itself through Twitter posts, but expects to go live in August. Every six months, users will be vetted to ensure they're still students. Bringing greater efficiency and transparency to student discounts make sense, said Larsen. "Here, you have a closed audience of tomorrow's shoppers," he said. "That's why retailers like Apple, J. Crew, The Limited and Club Monaco have given the deepest discounts to students for years." <wwd.com/media-news>

- Is the summer season a washout? - As consumers get ready to celebrate July Fourth, many merchants already have dismissed summer as a washout. Macy's flagship store has racks of summer tops, swimwear and dresses marked down as much as 50%, while luxury retailer Bergdorf Goodman is slashing prices on designer goods by as much as 70%. Meanwhile, piles of clothing as well as barbecue grills, tents and gardening tools are bypassing stores and heading straight to liquidators as merchants try to conserve their cash. Such deep discounting so early in the season is great news for bargain hunters, but it's a worrisome sign that shows a further weakening in retail sales since the end of May. Consumers' confidence in the economy, which had surged in April and May, is projected to be virtually unchanged for June when The Conference Board releases figures Tuesday. And major retailers will release June sales results next week. While unusually rainy weather across a broad swath of the country has dampened business, some analysts wonder whether shoppers are waking up to the harsh reality that the economy won't be getting any better soon - even as consumer spending makes up 70% of economic activity. That doesn't bode well for merchants, which need to get rid of summer inventory quickly to make room for fall goods that start to arrive next month. BMO Capital Markets analyst John Morris estimated that the volume and size of discounts for mall-based apparel retailers he tracks is 10% higher than last June even though inventory is down 20%. <google.com/hostednews>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): ARO

06/30/2009 12:48 PM


Levine's love for retail does not find itself in this name. Peak margins for a company with peak momentum is always worth a shot (particularly when we can make sales here alongside the insiders). Short high. KM


SWHC: Michael Golden, President & CEO, sold 13,758shs ($70k), less than 5% of common holdings. Nicholas Leland, VP of Sales, sold 6,772shs ($35k) less than 5% of common holdings. Ann Makkiya, Corporate Counsel & Sec., sold 7,833shs ($40k) approximately 30% of common holdings. Ken Chandler, VP Operations, sold 3,598shs ($18k) less than 10% of common holdings.

DSW: Doug Probst, SVP, CFO & Treasurer, sold 4,154shs ($40k) after converting 13,000shs of restricted stock units to common shares. Deborah Ferree, Vice Chairman & Chief Merch. Officer, sold 9,010shs ($86k) after converting 28,200shs of restricted stock units to common shares. Kevin Lonergan, EVP & COO, sold 3,195shs ($31k) after converting 10,000shs of restricted stock units to common shares.

DECK: Peter Worley, President of Teva, sold 1,500shs ($106k) or roughly 5% of common holdings as part of 10b5-1 plan.



 Retail First Look: 7/1/09 - sector view


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.

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"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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