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Charts Of The Week: Unemployment's Double Top

When we called this out as a major go forward positive in March (post the February employment report), not many people agreed... and after the stock market's response to the better than expected unemployment rate on Friday, I have no reason to believe that consensus will agree with me right here and now.

The crowd likes holding hands. In the moment of redness, post a +40% trough-to-peak rip from the March 9th low, I understand how it may be hard to see that the US stock market may have already discounted some of this better than expected economic news. This is what it is. Markets look forward.

The June unemployment rate came in at 9.5%. That was both better than expectations of 9.6% and only a 10 basis point sequential increase versus that last nosebleed charge (+50bps sequentially) that we saw in May versus April. This, on the margin, is bullish for the US Dollar and bullish for long term interest rates. We aren't going to have the next Great Depression. Sorry storytellers.

Plenty of people still mistake  good news for the US currency as good news for stocks. After markets recover from their freak-out lows, that doesn't make sense in the early part of a recessionary recovery. What's good for the economy, is bullish for interest rates and the Dollar. What's bullish for those two factors is nasty for what's been working for the last 3 months - the REFLATION trade. 

In the charts below, Andrew Barber provides important historical context. My view is that in the next 6-9 months, you're going to see this chart of US unemployment rollover. No, I'm not saying it's a new bull market in employment. I am simply saying that the rate of change will rollover to down sequential monthly reports.

Keith R. McCullough
Chief Executive Officer

Charts Of The Week: Unemployment's Double Top - ab34

Charts Of The Week: Unemployment's Double Top - ab45


Retail First Look: 7/6/09

TODAY'S CALL OUT

Ok, it's been raining... I get it.

Either the market does too, or it simply doesn't care.  It doesn't take an intuitive genius to figure out that nearly every retailer will mention weather as a culprit this Thursday when sales are released. Even those that put up decent numbers will mention it, simply because the market is allowing them to do so. I won't argue that Retail stocks are cheap here - because they're not. But combine the 'Mother Nature Free Pass' with what we think is more important - the topping process of unemployment (a lagging economic indicator) in the rear view and it's tough to be short US Consumer stocks right now.   Check out Keith's comments on that front in his Research Edge Early Look this morning. I'll point you toward an interesting call out on the earnings front.

Check out the earnings revision charts below (earnings revisions vs stock performance); one on a shorter-term basis, and the other back to 2001. I'm often asked why I look at chart #1 given the seemingly low correlation.  My answer lies in chart #2. Over time, revisions synch lock-step with the stocks. I know, not exactly a revolutionary thought there, either. But the interpretation is probably what matters most. Right now we're sitting at flattish 90-day stock performance, and revisions that are still positive. Have they stalled? Yes. Could they ease on the margin as weather is baked in to numbers? Yes. But we've got a mid-teens pe on a group where the consensus thinks it will grow only 8% over the next 12 months. That will be a tough number for many starting in holiday. But that's a long ways off for a short who is just starting to enjoy summer.

Retail First Look: 7/6/09 - 90 day revision

Retail First Look: 7/6/09 - 90 day historical chart

Retail First Look: 7/6/09 - NTM PE

Retail First Look: 7/6/09 - sector view

MORNING NEWS 

- More issues in Honduras - More global sanctions have been called to be imposed on Honduras unless democracy is restored following the military coup which has ousted Honduran President Manuel Zelaya reported in the international press. The global union for workers in the textile, garment and footwear industries has added to condemnation of the coup, and is calling for an urgent review of trade with the country. "It is particularly regrettable that some elements of the Honduran business community, including the export sector, appear to support the overthrow of democracy," said Neil Kearney, general secretary of the International Textile, Garment and Leather Workers' Federation. <fashionnetasia.com/industryupdate>

- Russian fashion and footwear - Despite clothing sales slump due to the economic downturn, Russia's fashion and footwear market has created opportunities to allow retailers to further expand and diversify their portfolios. Melon Fashion Group has acquired the Taxi clothing retail chain consisting of 14 stores and launched a new retail project under the Love Republic banner. Earlier this year, Sun Investment Partners bought a 33% stake in the CentrObuv footwear retail chain, and maternity wear specialist Budu Mamoi said it expects to double its store count this year. Foreign clothing and footwear retailers tend to continue their expansion and increase the level of market penetration. For instance, H&M entered the country in March 2009 with two stores in Moscow and plans to open its stores beyond the capital city. The Japan-basedUniqlo and the US firm GAP are also said to be considering expansion into the Russian. <fashionnetasia.com/industryupdate>

- Indian retail industry may see benefits in the nation's budget - The Indian retail industry is all geared to look at what the Finance Minister has to offer to the different industry segments in this year's budget. Organized retail accounts for approximately 5% of the total retail business in India, Chadha reminds. "Thus, there is a tremendous scope for the retail sector to contribute to the Government in terms of taxes and serving the economy by generating employment opportunities, improving supply chain management, reducing wastage, and offering goods to consumers at discounted prices." <hindu.com>

- DHL to serve more Indian locations in India - Logistic firm DHL is planning to have around 1,000 outlets in the country in next two years time, as part of its retail expansion move.  "We are planning to have around 1,000 outlets in the next two years as there is a need to be present in lot new locations in the country," DHL Express head of marketing - South Asia, Chandrashekhar Pitre said.  After the DHL-Blue Dart mega co-branding spree, there are 350 retail outlets and we plan to take the number to 1,000 through various formats such as tie ups, alliances and partnerships, he said. Pitre further said: "At present our retail segment contributes 8-10 per cent of our total business and in next 3-5 years we expect out retail segment to contribute as much as 20 per cent".  <indiaretailing.com>

- Sourcing at risk in Bangladesh - After four days of angry protests over pay and conditions during which several factories were forced to close, the Bangladesh government had reached an agreement with unions over increased pay and better working conditions as Drapers went to press. However, supply chain and sourcing experts said further riots in the area were inevitable as demand for garment manufacturing in Dhaka rises. Dhaka is one of the cheapest sourcing bases for high street retailers, partly because of low wage costs. However, if riots gain momentum, manufacturing could be threatened and the supply chain of UK retailers disrupted. Chains such as Primark and New Look source out of Bangladesh. <drapersonline.com/news>

- Violence in Chinese factory - Violence broke out Sunday in the capital of China's mainly Muslim northwest region of Xinjiang where an unknown number of people attacked passers-by and torched vehicles, state media reported. Thousands of protesters from the Turkish ethnic group Uighur clashed with police and two people died. At least 300 people had been arrested. He said the confrontation involved about 3,000 Uighur and 1,000 police who used electric cattle prods and fired gunshots into the air to try to disband the demonstration. He said it was sparked by a recent dispute at a toy factory between Chinese and Uighurs over a rumour that Uighurs had abused a Chinese woman. <google.com/hostednews>

- Vogue dips into the discount realm - When a magazine features items like a $40 Gap hat, a $50 pair of J. Crew shorts and a $48 Tommy Hilfiger scarf, one might assume that the magazine is Cosmopolitan or Lucky, proudly midrange publications. But in fact, the magazine is the high-fashion bible Vogue, which has gone budget-conscious in its July issue, promising a "Steal of the Month," and a section with all items under $500. Vogue included a gift guide in December in which all the products were under $500, a 100-under-$100 article in March, and a "Steal of the Month" in June as well as July. Part of the shift was because of the economy, Ms. Singer said, and part of it was that popular designers like Phillip Lim and Alexander Wang were selling clothes at reasonable prices. Chain stores, as well, have stocked increasingly sophisticated designs, she said. Despite the proliferation of Gap and Nine West items in its pages, Ms. Singer said she was not worried that Vogue would be confused with its price-conscious sisters. <nytimes.com>

- California and Hawaii think better of imposing sales taxes on e-retailers - Threats by retailers to end affiliate marketing relationships in states trying to tax sales generated by affiliates have had an effect. The governors of California and Hawaii have vetoed legislation that would have imposed such taxes in those states. <internetretailer.com>

- Tough Times in California - The California economy keeps sinking and retailers and manufacturers are bracing for the worst. The state, which has the world's eighth largest economy, can't pay its bills because lawmakers have been unable meet a deadline to close a budget deficit that has swelled to more than $26 billion. The sales tax increase to 9.75% in Los Angeles County last week and unemployment at a 30 year high at 11.5% are bad indicators. Merchants said the state's decision to begin issuing IOUs on Thursday will undermine already weakened consumer confidence and spending. <wwd.com/retail-news>

- Prada plans to expand retail space - After opening 34 stores in 2008 and with plans to continue at a similar pace over the next three years, a Prada spokeswoman confirmed Thursday the Italian luxury firm was set to unveil at least two boutiques this month - in Paris and Prague - and remodel and expand others. Prada aims to generate more than 70% of consolidated turnover from directly operated stores by 2011, from around 53% currently, a company spokesman said last month. At the close of 2008, Prada's directly operated store network totaled 238 boutiques worldwide. <wwd.com/retail-news>

- British retailer and brand realigning business - Joseph, the fashion retailer that's been selling designer labels to Londoners since 1972, is getting a long-awaited facelift, and building its wholesale and retail businesses under new chief executive officer Sara Ferrero. Ferrero, formerly ceo at Furla, who joined the company last year, has begun revamping stores, introducing edgy new designers and giving the Joseph private label collection --which counts Selfridges, Harvey Nichols and Le Bon Marché among its stockists - a new lease on life. Alain Snege, a former buyer at Colette, has also joined as artistic director and head of buying, with the job of giving a new direction to the company's 28 freestanding stores worldwide. Ferrero said the brand's wholesale line's prices are designed to be about 30% to 40% less expensive than the designer brands the Joseph stores carry. Management is working on building the label in the U.S. <wwd.com/retail-news>

- K-Swiss taps pro skater  to represent new skate line - K-Swiss signed pro skater Greg Lutzka as creative director of the line, part of its recently created California Sports division. Lutzka, 24, will be charged with building a skate team with both professional and amateur riders. He also will serve as the face of the brand and offer input on new product. Lutzka, who was previously part of El Segundo, Calif.-based Globe International's skate team, is a seven-year pro and an X-Games medalist who swept the 2009 Tampa Pro. Nichols characterized Lutzka's commitment to K-Swiss as "multiyear" and said the skater will have offices at K-Swiss' headquarters. The brand said it would announce a skate brand manager and dedicated skate team shortly. Skate is a new category for the athletic firm, part of a broader brand revamp that focuses on its California roots. The company will debut a small series of men's-only lifestyle looks and performance skate shoes (including a Lutzka signature shoe) priced from $70 to $90 for spring '10. <wwd.com/footwear-news>

- Former Crocs CEO Leaves Board - Crocs Inc.'s former CEO has resigned from the company's board of directors, according to a filing with the Securities & Exchange Commission. Snyder left the board for personal reasons and not because of any disagreement with the company. Snyder announced his retirement in February, effective March 16, from his role as president and CEO. He remained on the board to offer any help to his replacement, John Duerden. Snyder had served as Crocs' CEO from January 2005. <sportsonesource.com/news>

- VF Imagewear officially introduced the VF Licensed Sports Group - VF Licensed Sports Group is a division focused on the development of both on-field and licensed sports apparel. Previously known as VF Activewear, the VF Licensed Sports Group's growth accelerated with the 2007 addition of Majestic Athletic and this year's opening of a new manufacturing and distribution facility in Easton, PA. The new location enables faster speed to market by aggregating eight smaller facilities. "This is much more than a division name change, but really a statement about who we are and where we are going. Our mission is to take the strategic goals of leagues and retailers and create winning licensed apparel programs," said Jim Pisani, President, VF Licensed Sports Group. <sportsonesource.com/news>

- Drop in Ralph Lauren's Compensation - Ralph Lauren's official compensation as chairman and chief executive officer of Polo Ralph Lauren Corp. dropped more than 40 percent during the 2009 fiscal year, despite a 25 percent raise in his base pay. <wwd.com/business-news>

- Safilo Group SpA postpones loan payment - Safilo Group SpA said Thursday its lending banks had agreed to postpone to the end of the year a loan payment due June 30 and waiver the respective debt covenants, while sale talks continue with potential suitors. The Italian eyewear firm's majority shareholder, Only 3T SpA, is in talks with at least two private equity funds about selling a stake to ease Safilo's debts amid declining demand. <wwd.com/business-news>

- Nine West Flashes Back - The 1980s (similar to the 2000s) was a decade of high gas prices, recessionary times and larger-than-life fashion and entertainment...  And Nine West is betting that consumers see the similarities, too. For its fall advertising campaign, the New York-based accessories brand is harking back to the Reagan Era, with glossy images inspired by the '80s. The campaign sets the brand's high-glamour products against the bare landscape of Joshua Tree National Park in California to play up the dramatic details. The campaign will hit in select September fashion magazines, as well as in stores and on the Nine West Website. <wwd.com/footwear-news>

- JJB Sports looks for more cash - JJB Sports, the U.K. sports retailer, is considering selling new shares as one of "a range of possible options" to provide more cash for the group. The company confirmed "it is reviewing a range of possible options to provide additional capital for the group. <sportsonesource.com>

- Bebe signs new chief merchandiser officer - Kathy Lee, most recently senior vice president of merchandising at Forever 21 Inc., has rejoined Bebe Stores Inc. as chief merchandising officer of the Bebe retail division. <wwd.com/business-news>

- Former Adidas CEO passes away - Robert Louis-Dreyfus, the former adidas-Salomon AG chairman & CEO and current owner of the Le Coq Sportif brand and the Marseilles, France soccer club, lost his battle with leukemia on Saturday. He was 63 years old. Dreyfus assumed the chairmanship of adidas AG in 1996. He served in the leadership role until 2001. <sportsonesource.com>

 

INSIDER TRADING ACTIVITY:

BBBY: Arthur Stark, President & CMO, sold 60,000shs ($1.8mm) nearly 30% of common holdings.

CHRS: Jeannine Strandjord, Director, purchased 5,000shs ($19k) on a base of roughly 95,000 shares.

COH:

  • Michael Devine, SVP, CFO, sold 2,865shs ($77k) after converting 7,642shs of restricted stock units to common shares.
  • Michael Tucci, President, NA Retail, sold 5,509shs (~$150k) after converting 14,696shs of restricted stock units to common shares.

CROX: Thomas Smach, Director, sold 28,000shs ($96k) roughly 50% of common holdings pursuant to 10b5-1 plan.


Mr. Hypothetical

“No one can possibly achieve any real and lasting success, or get rich in business, by being a conformist.”
-J. Paul Getty
 
On the margin, I thought the unemployment report for May was bearish and the one just reported for June bullish. Bearish and bullish for the US Dollar that is...
 
Fully accepting that the aforementioned statement is a long way from consensus, I am cool with that – it was when I called the May report US Dollar bearish. I have a quote taped on the inside of my notebook from the Science and Technology section of The Economist dated February 7th, 2009 that says “what seems to be going on is that everyone instinctively feels compelled to copy the others, rather than making an independent assessment of the situation.” The article was about evolution.
 
Are we, as an investment community here in the United States of America, taking this Crisis in US Financial Credibility as an opportunity to evolve? Or are we doubling down on the groupthink that got us in this mess?
 
Consider the following Bloomberg headline this morning (#2 in terms of stories read as of 530AM EST) “Stocks, Oil, Metals Drop on Economy Concern; Yen, Dollar Gain.” Does that even make any sense? If you believe that global currency markets are lagging indicators, maybe… but the entire notion that long term interest rates (10y year US Treasury yields) and the US Dollar strengthening off its lows in the last 3-days is a lagging indicator doesn’t make any sense to me. Currency markets are leading indicators.
 
With the SP500 having corrected -5.3% from her YTD high of 946, if you are still in the Depressionista camp and you are following the perpetually negative stance of Alan Abelson, you might even believe that unemployment is NOT a lagging indicator. While I still can’t believe he wrote that, he probably can’t believe that Chinese stocks hit another YTD high last night either! 
 
Perpetually polarized in your political or investment view is not an evolutionary process. Objective minds get that. When Abelson called the “second derivative” thesis “hypothetical, but bullish” this weekend, what he was implying, I guess, is that calculus is some form of alchemy.
 
The New Reality is this: the US investment community’s consensus drum beaters need to evolve or the USA is going to continue to get run-over by the Chinese at +71.6% YTD. The ways of investing along the lines of the perceived wisdom of Wall Street’s crowd have rendered a YTD return for the Dow Jones Industrial Index of -5.7%.
 
Yes, the Dow is an old school index that the math guys rarely use anymore (30 components are less statistically relevant than 500 – fascinating conclusion), but next to London’s FTSE index, which has lost -5.6% YTD (as of this morning’s down -1.2% open), that’s about as bad as major country indices get.
 
Now back to last Thursday’s unemployment report. In terms of our intermediate term TREND cycle work, our investment process cares about one line item in that report – the unemployment rate.
 
At 9.5% year-over-year unemployment, the month of June was only a +10 basis point rise versus that of May (9.4%). This stands in stark contrast to the +50 basis point rip we say in May versus April (8.9%) and this, Mr. Hypothetical, is what we call a sequential deceleration in the rate of growth.
 
So what did I do with this? After the May report (first week of June), I started selling down gross long exposure to US Equities  and shorting US Consumer stocks. I currently hold a 9% position in the Asset Allocation Model to US Equities, and I’m short both Consumer Discretionary (XLY) and Consumer Staples (XLP).
 
Now what do I do? With the topping process of a lagging economic indicator in the rear-view, I will be covering my shorts in US Consumer stocks, and taking up my gross long exposure to US Equities. Being short anything on a perpetual basis is no risk management process of mine.
 
I know, I know… this probably doesn’t rhyme with what you’re seeing on CNBC this morning. It definitely doesn’t jive with a front cover article on Barron’s called “Short These Stocks.” But you know what? I really couldn’t care less. If all I did was follow these thundering herds, I might be agreeing with Merrill (or is it Banker of America?) this morning and getting bullish on my Chinese growth estimates AFTER the Shanghai Composite Index has move +80% to the upside!
 
Let’s not get our shorts in a knot this morning. The New Reality is that the crash and bubble watchers are consensus, and we men and women of the risk management gridiron see a fairly straightforward immediate term trading setup that’s both proactively predictable and manageable.
 
Looking back at another peak in sequential US unemployment gains (May) provides the US Dollar an immediate term bid. Dollar up = everything else down. That’s what I saw on Friday. What I see now, at a price, is an opportunity to start getting invested again. Buy low, sell high.
 
I have intermediate term TREND line support for the SP500 down at 871 and long term TAIL resistance for the US Dollar Index up at $82.32. Understanding that US stocks have an inverse correlation to US currency has been the 2009 strategy, and until that math breaks down there’s no reason to dance to the consensus beat of Mr. Hypothetical’s alchemy.
 
Best of luck out there this week,
KM


LONG ETFS

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.  Energy flashed a major negative divergence last week.  TRADE and TREND are positive.

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.


SHORT ETFS

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.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

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.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

THE MACAU METRO MONITOR

BOTTOM LINE KEY AS GALAXY COMES DOWN TO EARTH scmp.com

Galaxy Entertainment is weathering the current financial storm by adopting a more prudent growth strategy to suit demand.  One example of this is the slowing of the construction of its HK$10 billion Cotai mega-resort.  Executive Francis Lui Yiu-tung told the SCMP that Galaxy would be patient and wait for "more solid trends developing in the market before we pull the trigger".  

For now, the company is focused on the bottom line; 2,400 gaming staff recently received an effective 13.3% pay cut.  Galaxy has also bought back US$200 million in its own bonds at a 50% discount.  Mr. Lui calls for infrastructure improvements to drive visitors to the Cotai resorts.  Many are viewing the performance of City of Dreams as a leading indicator of the future development of Cotai.

 

SO, WHO HAS BEEN HIT destination-macau.com

Although revenue-share numbers leaked by the DCIJ show that the Macau market was down 17% in June compared to last year, compounding worries about swine flu, cancellation of "zero-cost" tours, and the economic crisis, there is reason to be optimistic.  Despite gaming revenues for the first half of 2009 being down 12%, the half-yearly trends from 1H07 through 1H09 have followed a positive trajectory.  The first half of 2008 was an anomaly, so 1H09 saw negative growth year-over-year, but the positive long-term trend remains intact. 

Destination Macau cites commentary from "casino bosses around town" stating that the 400,000 less visitors in May 2009 didn't hurt business too much.  It is likely that this was low-end traffic made up for by VIP volumes.

  

TWO NEW IMPORTED CASES, NINE FULL RECOVERIES macaudailytimesnews.com

Two new imported cases of the A-H1N1 flu were detected yesterday, bringing the total number of cases to fifty-six.  Nine people have been released from quarantine, having recovered from the flu.  Presently, there are one hundred-and-twenty-four people receiving domestic medical observation. 

The pandemic alert in Macau is at level 6, while the World Health Organization's pandemic alert remains at phase 6, with a moderate severity. 


BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE

It's difficult to predict the future but the Macau market participants cannot even predict the present. What's going on with the visa restrictions? Ask ten different people, get ten different answers.  Our best guess is that Beijing is constantly tinkering with the goal of restricting market growth to the mid-to-high single digits, in-line with China's GDP growth.

We think, by now, Beijing has a pretty good feel for how much to turn the spigot to drive the desired growth in Macau. The days of 15% growth are over but controlled mid-to-high single digit is likely. Given the excess demand that Beijing must restrict to maintain moderate growth, Macau EBITDA likely warrants a higher multiple.  However, over the next 18 months, Mass table supply growth will be significant (see chart below) and we doubt Beijing is targeting same store growth.  Thus, same store growth in the Mass segment will be decidedly negative.

BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE - macau mass market table growth 

The market share wars are likely to escalate.  As we found out during our trip to Macau in late June, some properties are beginning to offer rebates to players of between 0.3% and 1.0%, depending on whether there is a buy-in amount.  Q2 margins should look worse on a sequential and YoY basis for Q2 2009.  As can be seen in the following EBITDA chart, margins are already in decline.  The promotional environment will only worsen, putting even more pressure on margins through mid 2010. 

BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE - macau ebitda margins 

The Mass properties are particularly at risk:  LVS's Venetian and Sands, Wynn Macau, and MGM to a lesser extent.  The Sands must also contend with SJM's Oceanus opening up in late 2009 which will be as direct of a competitor as there can be.  We wrote about this in our 6/28/09 note "OCEANUS TO SINK SANDS".  On the other hand, City of Dreams hasn't stolen many customers from Venetian which is good for Cotai but a negative for the Peninsula including Wynn Macau. 

Those clinging to the great Beijing savior might be disappointed.  Yes a new Chief Executive is taking over late this year.  While there may be some incentive for Beijing to provide a bit of a tailwind, a 25% increase in visitation is highly unlikely.  Same store revenues are going lower.

The only potential winner here is the guys adding new supply, particularly MPEL with City of Dreams and SJM with Oceanus. 


JUNE PLAGUED BY LOW RC HOLD

Market Commentary

With City of Dreams opening on June 1st, June should've been a better month in the aggregate.  It wasn't a total disaster though as Mass revenue increased and Rolling Chip (RC) volume declined only modestly.  Low RC hold % made the market performance look much worse.

LVS was the only winner this month, due to "lucky" hold at both properties.  WYNN had a bad June, partly attributed to worse hold than May, although still in the "normal" range.  Galaxy & SJM are holding their own.  We all know about the abysmal hold at Crown so no point in belabouring that issue.  Here are the aggregate numbers.

Total table revenues down 17% to $978MM

  • Mass revenue up 3% y-o-y
  • RC revenue down 24%
  • RC volume down only 4%
  • Slot revenue flat

 

Y-o-Y property observations

LVS's table revenue down 6%

  • Sands table revenue down 27%, with RC down 34% and Mass down 14%
  • Venetian table revenue up 7%

WYNN table revenue down 36%

  • Mass down 16%
  • RC down 41%

SJM table revenue up 3%

Galaxy table revenue down 17%

  • However, Starworld's table revenue was actually up 1%

MGM table revenue down 19%

  • Entire decline coming from VIP as Mass was flat y-o-y

Altira (Crown) table revenue down 57%

 

Market Shares

LVS market share 25% up from 20% in May

  • Sands market share at 8.5% vs 7.1% in May, mostly due to better hold (65 bps better in June than May)
  • Venetian up to 17% from 13% in May, mostly due to better hold (May was a weak month at 2.4% but June was high at 3.6%)

Wynn down to 13.7% from 17.25% in May

  • Partly due to worse hold at 2.75% vs 3.3% last month
  • Cotai gaining share at the Peninsula's expense?

MPEL share down to 9.1% from 10.4% in May

  • Everyone knows hold was bad, 1.6% blended vs 2.92% in May

SJM share down 1% to 30.75%

Galaxy share flat sequentially at 12.8%

  • Starworld share up to 9% from 7% in May

MGM share up to 8.3% from 7.4% in May


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