Smith Travel Research (STR) materially altered its forecast for 2010 US RevPAR.   STR now forecasts that RevPAR will decline 3.7% next year.  Research Edge has been predicting negative 2010 RevPAR since we wrote "A GIRAFFE FROM HEAD TO TAIL" on January 29th, 2009.  That's quite a while ago. 

It's not that STR hasn't been vocal on the US lodging market; one of STR's recent updates (dated 5/3/2009), projected a 1.5% increase in 2010.  The difference in these projections is significant, especially given the brief span of time between the respective reports being published.   The sell side is still projecting flat-to-slightly up RevPAR in 2010. We doubt the industry has many cost levers left to pull.  Estimates need to come down. 

The negative catalysts we discussed in our 06/10/09 post, "JOIN THE CLUB" are still very much in play so we are not yet certain down 3.7% is enough.  Although with 2009 progressing the way it has (see below) the comp continues to get easier.

 STR FINALLY SEES RED - revpar july


Taiwanese exports for June released today registered at -30% on a year-over-year basis, the 10th consecutive negatively monthly reading. Exports to the mainland were down by almost 36% Y/Y, while coming in at the highest absolute dollar level since October of last year at $4.7 Billion USD.  At 27% of the total, exports to the mainland are continuing to demonstrate resilience and have stabilized Taiwanese production levels overall   -if not providing the surge that many bulls have been hoping for. Thus far, Chinese demand has not broadened significantly with consumer electronics and communications devices continuing to be the primary focus of Chinese buying.




This data continues to support our thesis on the Chinese recovery process. We will continue to closely follow export data from trading partners looking for marginal signs of change.

Andrew Barber



Our recent note, "REGIONALS: DISCERNING A TREND", outlined some key catalysts influencing the regional gamers.  The disappointing revenue numbers in May (even while lapping negative factors such as the IL smoking ban and the MO loss limit), do not paint an optimistic picture, nor does the skyward trajectory of the gas price chart.  Anecdotally, we are hearing June is likely to come in weak, despite an easier comparison. 

Unemployment is a key variable and we take a look at that metric in this note.  The unemployment chart below shows a different picture than that depicted in our 12/07/09 post, "THINK LOCALLY".  The y-o-y declines are of greater magnitude.  However, there are signs of stabilization in some gaming markets. 

GAMING THE UNEMPLOYMENT PICTURE - state unemployment trends 

The employment situations in Houston, Dallas, Shreveport, and New Orleans are not great but they are relatively better.  The sequential difference in the rate of change of unemployment in May from Q1 was generally flat in these metropolitan areas.  In the fall of 2008, these were some of the most toxic employment markets we monitored.  On the margin, this is positive for PNK, which derives 75% of its EBITDA from the Louisiana market.  Houston and Dallas are important sources of traffic for casinos in the Bayou State.

Omaha clearly has a relative advantage over other gaming markets when it comes to unemployment.  Along with St. Louis, it is one of only two metropolitan areas we examined that saw a decrease in unemployment from Q1 to May.  ASCA derives 15% and 27% of its EBITDA from the greater Omaha and St. Louis areas, respectively.   However, Chicagoland's unemployment picture is as bad, if not worse, than any other we monitor.  ASCA and PENN have significant exposure to the Chicagoland market. 

Las Vegas unemployment remains high and increased month-over-month in May.  Los Angeles, which feeds some of the local LV customers, is showing some signs of relative stability.  The year-over-year changes in unemployment for LA and Vegas were constant in May.  While we have written that housing is the most statistically significant macro factor for Las Vegas Locals (LV LOCALS: HOUSING TRUMPS EVERYTHING, 11/30/08), the deteriorating job market will hamper economic growth.  While the LV unemployment picture is not good for BYD, 2009 has already been discounted investors.  We remain more optimistic on 2010 due to continued population growth.

The national unemployment picture is important for the Las Vegas Strip, which depends largely on tourist visitation to drive revenues.  The y-o-y change in unemployment for May was 3.9%, worse than 1Q but identical to April.  This is far from encouraging.  The "less bad" thesis has played out and anecdotal evidence suggests the Strip is not getting any stronger. 

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Retail First Look: 7/7/09


View from Private Equity

We caught up with select private equity contacts recently who specialize in midsize consumer investments. The prospect of investment opportunity in retail/apparel sector remains bleak. Despite better visibility on the bottom of the cycle and on cash flows, lack of cost-effective financing for PE buyers seems to be the main reason for the minimal activity. The interesting call out there is that when fundamentals become more clear, but outside forces preclude a key buy-side constituent from hitting the bid - that creates an opportunity. There is clearly a wait and see approach whereby potential buyers have the patience to see companies fall under the court's protection before stepping in. With the cost of capital likely going higher, we're likely to see more strategic deals and less PE transactions.

New deals aside, we also addressed the environment for the companies already owned by PE firms. There's been no change to the trend whereby banks and commercial lenders that backstop loans with cash flow as collateral are doing whatever they can to avoid taking control of troubled assets - even when covenants are tripped.  

As for June trends in the mall. Father's day was promising, however traffic subsided post the event with the final week mall traffic was "brutal". Overall, the month did show a deceleration relative to the April/May trends. Interestingly, Canadian mall traffic is mimicking US trends. Despite these trends, there is a sense that the Canadian consumer remains in better shape than their American counterparts.

As for rent renegotiations, we're still not at the point where 'tenant-forced' renegotiations are a slam dunk. Landlords are not looking to bail out struggling retailers whose only hope may be rent concessions. Pier One was also mentioned as an example of a company that is seeing meaningful results from their strategic real estate repositioning.

Finally, there appears to be a growing view among the PE community that if deals are going to get done they will be more focused on medium to large size companies. The rationale here is that scale is key to generating operating leverage and garnering profitable market share gains as the economy improves. Does the prospect of a larger deal synch with the fact that cost of capital is rising? No.  In fact, the only way this makes sense to us is if the PE firms are getting 'safer' with their bets and are offsetting a higher WACC with a lower discount rate on future cash flows.  All in, that spells opportunity to us for names in small/mid-cap land.



- Domestic textile demand increases in China - China's domestic textile demand increased by 5.21% between January and May despite exports fell, according to the China Textile Industry Council. Local clothing consumption climbed from 14% in April to 22.1% in May, even faster than the 21.6% growth registered by Chinese retail. Although the export delivery value was down 8.23% over the same five-month period, the output rise was rooted in domestic consumption strengthened by governmental stimulus policies. However, faster growth for the textile industry is unlikely to kick in the near future as migrant workers and college graduates are still struggling to find work and therefore their clothing expenditure is unlikely to increase soon. <>

- Vietnamese textile and garment exports to Japan increase - Vietnam's textile and garment exports to Japan are expected to surge 20% to $900m-$1bn this year, boosted by preferential export tax rates introduced this month. Textile and garment exports to Japan using materials imported from Japan and other members of the Association of Southeast Asian Nations will enjoy a tax rate of 0%, rather than the previous 5-10% rate, under the Vietnam-Japan Economic Partnership Agreement. <>

- Indian leather exports grew in April but behind for the year - Indian exports of leather and leather products from April 2008-February this year reached $3.3bn, a growth of 2.73% year-on-year, according to the Council for Leather Exports (CLE). In rupee terms, exports grew 16.16%.Based on this trend, the exports for the financial year will be about $3.6bn, well below the $4bn target, CLE stated. Footwear holds a major share of 42% in the total export of leather products followed by leather goods (24.2%), finished leather (19.1%), leather garments (12.35%) and saddlery and harness (2.59%). Major markets for the Indian leather products are Germany with a share of 14.28% followed by Italy (13.2%), UK (11.42%), US (9.56%), Hong Kong (6.23%), France (6.23%), Spain (5.99%), Netherlands (4.22%), Denmark (1.73%), Belgium (1.53%) and Australia (1.52%). <>

- Sri Lanka bullish on future apparel exports - Sri Lanka's Joint Apparel Association Forum (JAAF) is targeting a turnover of over US$ 3.3 billion, through apparel exports this year. "We expect a turnover of US$ five billion by the end of 2011. At present, orders for summer and winter look steady this year, but the SME sectors are going through a bit of a tough time. However, the companies will be better off as soon as the global economy improves. Due to the global economic downturn most western countries will recover soon as Sri Lanka supplies apparel for them, he said. Competition among the apparel industry has grown rapidly - locally and internationally. The large-scale companies will catch up the markets while the SME sector is losing possibilities in the industry as they are unable to provide the orders for high quality products and deliver them on time.  Companies are calling upon the Government to reduce taxes in the export sectors, for exports to grow. <>

- US trade relations - Apparel executives believe regional trade deals maintain their promise as a model for international trade relations, despite some data raising questions about the benefits. Sourcing executives and trade experts said regional accords such as the Central American Free Trade Agreement and the North American Free Trade Agreement should be a key part of U.S. strategy because they deliver more benefits than bilateral pacts and are more manageable than larger multilateral agreements like the stalled Doha Round of global trade talks. The regional agreements give "large American retail and wholesale operations...the opportunity to look not just at a small-to-medium-sized country" but to a far wider area, said Jeff Streader, senior vice president of global sourcing for Guess Inc.  <>

- Protectionist measures are significantly affected textiles and apparel - Textiles and apparel, along with motor vehicles and parts, iron and steel, and chemical products, have been the manufactured goods most affected by new protectionist measures, such as tariff hikes and antidumping investigations, during the second quarter. A report compiled by World Trade Organization director-general Pascal Lamy said the number of trade-restricting or -distorting measures announced from March 1 through June 19 "exceeds" the number of trade-opening measures "by a factor of more than two." The leading trading powers, or G20, which includes the U.S., China, India, Argentina, Brazil, Germany, the U.K. and Japan, have failed to live up to commitments not to impose restrictive measures that distort global trade. The list of measures identified in the textiles and apparel sector included the initiation of antidumping investigations by Argentina on imports of denim from China, by Brazil on imports of synthetic fibers from China, by Turkey on imports of polyester staple fiber from China and on imports of woven fabrics of synthetic yarn from Malaysia. Other measures initiated in the last few months include the increase in value-added tax rebates on exports of textiles and apparel and new export subsidies by India to cotton farmers, the report said. India has also initiated an antidumping investigation on circular weaving machines from China. The WTO said the impact of the economic crisis on world cotton-mill use is expected to cause a 27% drop in cotton trade to 6.1 million tons and production to dip 10 percent to 23.7 million tons. <>

- Obama and the apparel industry - Most trade experts expect Obama will approve some antidumping and countervailing duty cases, which could have implications for the apparel and textile industry. Some officials believe that the atmosphere in Congress is very hostile to trade. The President's overall trade policy framework remains a work in progress. U.S. Trade Representative Ron Kirk, the point man on global commerce, said last month that Obama plans to outline a new trade game plan in the "near future." The lack of specifics has been another factor in delaying measures on Capitol Hill. Obama took a tough stance on trade during the presidential campaign, singling out the unfair trade practices of China and urging the protection of U.S. workers and industries hit hard. But he has tempered his stance since taking office, balancing his emphasis on enforcement with warnings against protectionism while citing the benefits of more liberalized trade regulations. <>

- Less inventory in retail industry - With a new level of discipline tied to the times, retailers are hoping to eke out more profit with a lot less inventory. Inventory levels at many chains are down 15%  or more from a year ago, but instead of simply going on the defensive against stock gluts and consequent markdowns, stores quickly are learning to make their existing inventories more productive, bringing merchandise into stores closer to when it's needed and being more selective in what they buy and replenish based on actual sales results. <>

- American Apparel under NYSE review - American Apparel, Inc. announced that it received a letter from the NYSE that the Exchange accepted the company's previously submitted plan of compliance and, pursuant to such plan, has granted the company an extension until August 19, 2009 to regain compliance with its continued listing standards. As previously disclosed, on May 19, 2009, the company received a letter from the Exchange stating that the company failed to timely file its 10-Q. <>

- Macy's has cut the amount of newspaper ad spending in half over the past four years - While classified ad dollars have largely shifted to online sites like Craigslist, Macy's migration away from newspapers has more to do with specific business decisions that make it difficult to imagine newspapers recapturing those lost retail dollars. <>

- Reebok follows FitFlop and Others in muscle building shoe - Reebok has a sneaker out called Easytone. The sneakers actually tone key leg muscles every time you walk. Easytone uses something called balance pods, which essentially create what Reebok calls "natural instability". In layman's terms, when wearing the EasyTone sneaker, it's like walking in sand on the beach. That particular movement results in toning the gluteus maximus, hamstrings and calves due to increased use of those muscles. Now how cool is that? Miss the gym for a day or two, no problem. Just go about everyday business. Walk the dog, grocery shop, go to the mall, take the kids to the park and do whatever it is you do. As long as you are moving, EasyTone's will be working to keep you toned and fit. <>

Retail First Look: 7/7/09 - Reebok Fit Shoe 

- Consultant Toni Yacobian claims potential transactions are far too often overlooked - Yacobian that the industry's great failings is untapped consumer traffic. In their efforts to cope with the recession, she contends, retailers have applied the scalpel to personnel, prices and costs, and scrutinized all assets, except perhaps their most important one - the customers who enter their stores.  The Yacobian Group LLC, a 20-year-old Maynard, Mass.-based consulting practice with a reputation in training to motivate retail staffs and devising operating models to improve the customer experience, has begun offering retailers a new system called CIMS, or Customer Interaction Management Operating System. "It's like an X-ray into the in-store experience to see where it is not being properly delivered, and then it provides a means to set clear goals, from individual sales people right up to the chief executive, to increase productivity from existing traffic," explained Yacobian, the ceo of Yacobian Group. <>

- Christian Lacroix will undergo job cuts - Employees were informed Friday of a restructuring plan that could see the workforce cut to 12 from 124, effectively reducing the 22-year-old fashion house to a licensing operation. Workers were told layoffs could be avoided only if a buyer emerged for the troubled firm, which sought court protection from its creditors in May, caught between an expensive upscaling drive and a steep fall in orders amid the economic crisis. Nicolas Topiol, Lacroix's chief executive officer, said Monday letters of intent were expected this week and offers would be invited until the end of July. The restructuring plan, if activated by the current owner, Florida's Falic Group, would see only a handful of employees kept on board to manage Lacroix's licensing pacts, which include men's tailored clothing with Sadev, men's shirts and knitwear with Rousseau, wedding dresses with Rosa Clara and Mantero for scarves. <>

- Links of London plans US expansion - With a new president for North America, a repositioned product line and the relaunch of its Web site, Links of London is embarking on U.S. expansion. The British brand plans to open flagships in select cities, and has forged a relationship with Bloomingdale's, where in-store Links shops are being unveiled. With a deep-pocketed parent - Athens-based Folli Follie Group - and lower-priced collections with items that can be worn in multiples, the company said it believes it can succeed during the recession. Meanwhile, Links' big sister, Folli Follie, has its own growth agenda. With 250 directly owned and operated stores in Asia, Folli Follie hopes to ultimately open the same number of units in the U.S., said Ketty Koutsolioutsos, co-founder and creative director of the Folli Follie Group. <>

- Japan's Aeon Posts Fourth Loss in Five Quarters on Declining Clothes Sales - Aeon Co., Japan's second-largest retailer, reported its fourth net loss in five quarters after clothing sales continued to slump amid the country's worst postwar recession. <>

- Adidas Plans to Raise 500 Million Euros in Debut Bond Issue in Currency - Adidas AG is raising 500 million euros by selling five-year bonds, the sporting goods maker's first issue of notes in the currency. <>

- Neiman Marcus appoints new Chief Marketing Officer - The Neiman Marcus Group, Inc. announced today that Wanda Gierhart has been appointed Senior Vice President, Chief Marketing Officer. Ms. Gierhart will report to Karen Katz, President, Chief Executive Officer of Neiman Marcus Stores and Executive Vice President of The Neiman Marcus Group and will be responsible for marketing, market research, advertising, sales promotion, and customer insight activities for Neiman Marcus Stores, Neiman Marcus Direct and Bergdorf Goodman. Her appointment will be effective August 10, 2009. <>

- JNY is starting to hire again - offers a job board for people looking for positions in e-commerce. Latest postings include a director of Web production at Jones Apparel Group; a vice president of merchandising at ideeli; and an e-commerce marketing manager at Oriental Trading Co. member companies are invited to post jobs for free. <>

- Seeking Alpha calls out WEYS - Today's research recommendation is Weyco Group (WEYS) because the stock price fell within 10% of the 52 week low during intraday trading. According to Standard and Poor's, Weyco Group distributes, wholesale & retail, men's branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands. WEYS has increased its dividend for 28 years in a row which gives us ample information about the quality of the company's management. Essentially, WEYS has survived 4 recessions of varying degrees since 1980 (current recession excluded.) As recently as May 28, 2009, WEYS has increased the dividend by a little over 7% from $0.14 per quarter to $0.15. This indicates that management believes that although the current recession could get worse the company will survive. <>

- Lacoste ad with losing Roddick - It has become a standard tradition that when a sponsored athlete wins a big tournament, the company runs a full page ad in a newspaper to congratulate them. It was surprising to see an Andy Roddick ad on the back page of the New York Times sports section after his loss. <>

Retail First Look: 7/7/09 - Andy Roddick Lacoste


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

07/06/2009 10:40 AM


Breaking $33 and the hearts of the skinny jeans fans. Covering a -3% down move today. McGough/Levine will re-short it when it's up on another fashion call. KM

07/06/2009 09:41 AM


Booking the gain here. We'll re-short strength, at a price. Barron's being short the weather is obviously company that I don't need. KM



DKS: Goldman upgrading to Buy from Neutral, price target to $20.

JNY: Goldman upgrading to Buy from Neutral, price target to $12.

KSS: Goldman upgrading to Buy from Neutral, price target to $50.

BJ: Goldman downgrading to Sell from Neutral.



LQDT: Jaime Mateus-Tique, President & COO, sold 6,400shs ($65k) as part of 10b5-1 plan, a fraction of 2.6mm shares in total common holdings.

MW: Carole Souvenir, EVP & Chief Legal Officer, ER, sold 3,825shs ($77k) nearly 50% of total common holdings.



Retail First Look: 7/7/09 - SV 7 7 09

The Truth

"Whoever is careless with the truth in small matters cannot be trusted with the important matters."
~ Albert Einstein
At 4:15AM this morning, I was driving down Highway 95 listening to President Obama's address to Russian students. No matter what your politics, Americans should be proud of this man's oratory skills. On that score, he is truly gifted.
In the eyes of the Russians, I am sure the content of the speech is subject to debate. When it comes to the truth - there are always two sides to a story. Recent American economic history with the Russians remains scarred. Do the Russians actually trust us? Do we have any reason to trust them? President Obama is asking the Russians for a "fresh start", and it will be interesting to see if that incorporates America changing as we are asking for as much in return.
Relationships are built on trust. Being careless with the global financial truth is what America's currency currently has issues with. Surely, when it comes to US intelligence agencies like the FBI, CIA, etc, we are at least perceived to be on the cutting research edge of information transfer. That said, when it comes to our intelligence on global finance we are in the midst of a colossal Credibility Crisis. Being careless with the truth includes not understanding it.
My contention isn't a partisan one - it's a political one. Understanding global macro is a regimented daily exercise in objectivity, not a CYA job security show. From Bush to Obama, we have empowered an economic team of group-thinkers. We have reactive and politicized points of action. We don't have a proactive risk management process.
In 1913, the US Federal Reserve was created to protect the US currency and her country from crisis', not to perpetuate them. Fixing this will take time. The truth of the matter is that we have a team of lawyers, politicians, and professors who don't have a repeatable/practical investment process that they hang the country's balance sheet on every morning. Washington doesn't do global macro. Obama's team doesn't have the tools to show him the truth.
Understanding that Obama's intention of asking for a "fresh start" was more of a point on foreign policy - understand this: the Russians, like us and the Chinese, care about money. After Obama is done shaking hands with Medvedev (who can't seem to look people in the eye), the global macro debate will move on to Italy and the G-8 Summit. The only "fresh start" you're going to see there is a renewed squeezing of America's standing as the fiduciary of the global economic system.
No, the Chinese aren't selling their largest position (US Treasuries) "suddenly", but they are selling it down gradually. Yesterday's Treasury auction bids were MIA and, as a result, the yield on 10 year Treasuries made a 2-week high at 3.54% . The recent Treasury data shows China as a net seller of Treasuries. The Russians have already told us they are selling, quietly, the Japanese continue to do the same.
The truth is that China has political issues. The truth is that America does too. The New Reality is that all of this, from Madoff/Stanford to what you are seeing on the streets in Western China (Urumqi protests), is being You Tubed, to the world, real-time...
You Tube is a 21st century metaphor for Transparency. The truth is harder and harder to hide. While plenty a short seller of everything China states that China "makes up their numbers", what would the Russians call Dick Fuld's interpretation of "level 3 assets"? We're hosting our Q3 Investment Themes call this morning for our subscribers and Andrew Barber will walk through China's latest disclosure and transparency efforts. At least they are improving.
Chinese stocks finally had a down day last night, closing -1.1% at 3089, taking the Shanghai Stock Exchange to +69.7% YTD. The truth is that relative to the SP500 and Dow Jones indices being down YTD, that's pretty impressive. So is Chinese economic growth. The head of the Chinese central banking research bureau is out with comments this morning suggesting that Q2 GDP growth in China could come in close to +7.5% year-over-year. That would be a sequential (quarterly) acceleration - those are good.
Am I suggesting that you run out and buy China right here and now? Of course not. After a decade on the buy-side, I know better than to hold a conference call suggesting people buy things at immediate term tops. We have been "long of" China since December of last year, and we are going to walk through why you should not be short it!
Despite Japan trading down modestly overnight (-0.34%), The New Reality remains that those who are shaking hands with The Client (China) in Asia are seeing their business improve alongside the stability of relationships with their neighbor. Taiwanese exports for June improved again overnight, and the stock market there traded up another +1% as a result. Indonesian stocks put in a +2.4% session, and both South Korean and Indian equity markets recovered into positive territory as well.
The truth is that the world's economies are as interconnected as they have ever been. The truth is that China has financial credibility right now. The truth is that America needs to wake up and smell the robusto beans. "Fresh starts" may begin with speeches, but need to end with actions that trade partners can trust.
I continue to see the US stock market as range bound. I have intermediate term TREND support at 873, and long term TAIL resistance up at 954. Manage your risk around that range.
Best of luck out there today,


USO - Oil Fund-We bought USO on 7/6 on a pullback in oil over the last week. With the USD breaking down, oil should get a bid.  

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.


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.


We first went out on the limb with the MPEL call on 6/30 with our "MPEL: NOT QUITE THE CITY OF NIGHTMARES" and the stock is only up slightly.  Granted, the XLY is down 4% since the note and LVS and WYNN are down 15% and 12%, respectively.  Thursday's release of preliminary numbers should've been more of a catalyst but for a 2.5% decline in the S&P and a CS First Boston downgrade post release.  The downgrade carried a lot of weight initially, sending the stock down 12%, but MPEL ended the day only slightly down which is more than I can say for its competitors.  Investors finally realized that calling out City of Dreams (CoD) for lagging the revenues of a property twice its size and fully ramped (Venetian) is not relevant.  Nevertheless, I don't get paid for moral victories.

So why am I still positive on MPEL but not Macau, LVS, and WYNN?  We are very concerned about supply growth, particularly when Beijing is restricting demand.  Specifically, the supply growth is concentrated in the Mass Market and Beijing effectively controls Mass visitation.  Our belief that Beijing is targeting mid-to-high single digit MARKET growth means that same store revenue growth will be decidedly negative.  We want to own the provider of new supply (MPEL, SJM) and sell those properties most susceptible to Mass market share loss (Wynn Macau, Venetian, and Sands).

City of Dreams June numbers were better than the whisper number and our expectations.  Here are our takeaways from last week's release:

  • CoD Mass Market drop was spot in line with our $100MM estimate
  • CoD Rolling Chip volume of $1.94BN was much better than our $1.5BN estimate. It looks like some of this strength came at the expense of Altira's RC which came in at $2.76
  • RC at Altira was down 55% y-o-y in June vs. down 44% in the 2 prior months. However, June was also the toughest comp of the year
  • Slot volume of $81MM came in above our $51MM estimate

The incremental news on CoD is likely to be positive since expectations have been set so low.  Both segments are ramping.  Mass advertising in mainland China only began two weeks ago and the VIP business was effectively launched a few days later.  With CoD's ramp and Beijing controlling the visitation spigot, Mass numbers for the existing Mass properties will be under pressure.  Wynn Macau is at risk due to the Cotai undertow pulling visitors away from the Peninsula while Sands may get drowned by the coming tidal wave of Oceanus (See "OCEANUS TO SINK SANDS").  We don't want to fight those tides.

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