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REGIONAL GAMING CATALYSTS, POSITIVE?

Positive catalysts in place for BYD, PENN, PNK

 

 

CALL TO ACTION

State gaming regulators will start reporting May gaming results later this week.  We expect sequentially improving trends with May’s regional gaming results and again in June (relative to Q1), which we believe will put a base under conservative Q2 regional casino estimates.  Regional gaming stocks have not performed well as of late so the release of better monthly numbers and a strong Q2 earnings season (relative to current projections) could provide a nice bounce in these stocks.

 

SETUP

Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops. 

 

State gaming regulators will begin to report May gaming results later this week.  Our proprietary regional gaming model forecasts May 2014 same store gaming revenue declines of only -2% as compared to -5% in April and -7% in March.  Insight into Missouri and Pennsylvania yields surprisingly decent May results.

 

Additionally, we call investor attention to the developing El Niño.  If the El Niño fully develops this fall/winter (Nov thru Feb), the milder weather condition will provide lower energy bills against an easy and super brutal comp of last year's polar vortex and thus, provide consumers with increased discretionary spending power. 

 

As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.

 

WHAT WE THINK WE KNOW

A sneak peek into Missouri’s numbers tells us a flat to up slightly May YoY is in the cards – better than expected.  We’re pretty sure PA will come in much better than previous months as well.  These two months provide support for our thesis that May will show nice improvement from the rest of 2014. 

 

Following an awful December, January and February on April 16th, we published a note “Regionals: April Flowers” then on May 14th we wrote “Regional Gaming: Trend Friend” wherein we noted we were hearing May was showing improvement from April (which improved from March).  Today, we are again calling investors to action as we believe PENN and BYD are positioned to exceed company guidance as well as investor expectations. 

 

THE FORECAST

As seen below, our early regional forecasting algorithm predicts May regional gaming revenues will decline 2%.  If we are correct regarding the developing El Niño weather pattern, 3Q and 4Q results could surprise to the upside. 

 

REGIONAL GAMING CATALYSTS, POSITIVE? - rr111

 

REGIONAL GAMING CATALYSTS, POSITIVE? - rr2

 

THE LONG-TERM

Bad demographics should continue to pressure regional gaming revenues. Younger generations are simply not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections. 

 

REGIONAL GAMING CATALYSTS, POSITIVE? - rr3

 

CONCLUSION

With confirmation from MO and PA, we’re pretty sure the May state releases beginning this week are going to look better.  Investors should begin to feel more comfortable with Q2 estimates and possible upside which could catalyze the stocks.  Over the near term, PENN looks to have the most upside given it has a beaten down stock price and overly conservative guidance.


June 3, 2014

June 3, 2014 - Slide1

 

BULLISH TRENDS

June 3, 2014 - Slide2

June 3, 2014 - Slide3

June 3, 2014 - Slide4

June 3, 2014 - Slide5

June 3, 2014 - Slide6

June 3, 2014 - Slide7

June 3, 2014 - Slide8

 

BEARISH TRENDS

 

 

June 3, 2014 - Slide9

June 3, 2014 - Slide10

June 3, 2014 - Slide11
June 3, 2014 - Slide12


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 3, 2014


As we look at today's setup for the S&P 500, the range is 46 points or 1.71% downside to 1892 and 0.68% upside to 1938.                                             

                                                                                  

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • YIELD CURVE: 2.17 from 2.14
  • VIX closed at 11.58 1 day percent change of 1.58%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 9:45am: ISM New York, May (prior 50.6)
  • 10am: Factory Orders, April, est. 0.5% (pr 1.1%, rev. 0.9%)
  • 10am: IBD/TIPP Economic Optimism, June, est. 46.8 (pr 45.8)
  • 1:50pm: Fed’s George speaks in Breckenridge, Colo.
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • President Obama meets with Polish President Komorwoski, Prime Minister Tusk; later meets with other Central, Eastern European leaders
    • Senate in session; House out
    • 9:30am: Senate Commerce panel hearing on Suface Transportation Reauthorization
    • 10am-5pm: CFTC’s Technology Advisory Cmte meets to discuss high-frequency trading, CFTC surveillance program, swap execution facilities
    • 10am: Senate Banking Cmte considers S. 2244, reauthorization of Terrorism Risk Insurance Program
    • 10:30am: Senate Judiciary Cmte hearing on proposed constitutional amendment that would let Congress try to reverse Supreme Court’s 2010 Citizens United ruling, which removed limits on corporate, labor union campaign spending
    • Voters in Calif., N.J., Ala., Iowa, Miss., Mont., N.M., S.D. select candidates
    • U.S. ELECTION WRAP: Primaries Preview: Miss., Calif., Iowa

 

WHAT TO WATCH:

  • Pilgrim’s Pride said to raise Hillshire bid to $55 a share
  • Travelport said planning to file for IPO as soon as this wk
  • Fidelity said to be competing to lead Uber round at $17b
  • May auto sales: SAAR may be 16.1m
  • Bank of America says mistake inflated reported dark pool size
  • Pimco’s record withdrawals at Total Return extend to 13th month
  • GM filed 2,004 injury reports on recalled cars, group says
  • Staples shareholders vote against executive-compensation plan
  • Microsoft names Office unit’s Teper to head corporate strategy
  • Obama said to unveil $1b European security fund in Poland
  • Avastin use for eye disorders may save U.S. $3b annually
  • Euro-area inflation slowed more than economists forecast in May
  • China HSBC manufacturing index rises to 4-month high in May
  • Rajan holds key India rate, signals easing if inflation slows
  • Energy supply requires $40t investment to 2035, IEA says
  • S&P censured by regulators on false French credit-rating gaffe
  • Chicago sues drug companies for pushing prescription opiate
  • Macau May casino rev. rises 9.3% y/y; est. 14.5%
  • World Bank rules out major changes in global GDP forecasts
  • GW Pharma, New York State plan trials for cannabidiol: WSJ

 

EARNINGS:

    • ABM Industries (ABM) 5pm, $0.40
    • Ambarella (AMBA) 4:05pm, $0.21
    • Ascena Retail (ASNA) 4:05pm, $0.19
    • Dollar General (DG) 7am, $0.73 - Preview
    • FuelCell Energy (FCEL) 6:06pm, $(0.03)
    • Hudson’s Bay (HBC CN) 7am, C$0.00
    • Mattress Firm (MFRM) 4pm, $0.35

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Brent Trades Near Three-Week Low on European Demand; WTI Steady
  • Gold Near 4-Month Low as Investors Weigh Stocks Against Dollar
  • China Builds Sulawesi Smelters as Ore Ban Cuts Jobs: Commodities
  • Copper Declines as Factory Orders Seen Slowing Down in U.S.
  • Corn Extends Decline as Planting of U.S. Crops Almost Complete
  • Coffee Gains as Volcafe Forecasts Shrinking Stocks; Cocoa Falls
  • Rebar in Shanghai Near Record Low as Iron Ore Inventory Climbs
  • Obama Climate Proposal Will Shift Industry Foundations: Energy
  • Japan Aluminum Buyers Said to Pay Record Fee as Demand Grows
  • Oil Tanker Hauling Disputed Kurd Crude U-Turns in Atlantic Ocean
  • Energy Supply Requires $40 Trillion Investment to 2035, IEA Says
  • Coal to Survive Obama ‘War’ as Efficient Plants Boost Demand
  • Asia Oil Demand, Global Prices May Suffer as GDP Estimates Fall
  • Arabica Coffee Heading for Bear Market as Rains Aid Brazil Crop

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


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CHINA TO IMPLEMENT QE?

Takeaway: It remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term.

We came across a number of articles today that discussed the possibility of China implementing western-style quantitative easing to counter its current disinflationary economic slowdown. In short, we summarily dismissed these rumors and will continue to do so until we see them confirmed by an official source (i.e. the PBoC, State Council, CSRC, MoF, etc.).

 

The powers that be in Beijing are akin to a management team that says what it does and does what it says. More importantly, their official guidance for ~2 years now  has been and continues to be one in favor of avoiding meaningful stimulus – either fiscal or monetary (see: commentary out of the PBoC’s Ji Zhihong on the targeted RRR cut).

 

We would view QE in China as a meaningful deviation from their “prudent monetary policy” guidance and should be interpreted as a signal that China’s intermediate-term growth outlook is actually more dour than current, already-subdued expectations.

 

CHINA TO IMPLEMENT QE? - CHINA

 

CHINA TO IMPLEMENT QE? - GROWTH

 

Chinese policymakers definitely have room to ease with respect to existing inflation and consumer confidence trends, but any easing should immediately filter through to rising inflation expectations given the annualized FX weakness we will see as we progress through this year  – which is in addition to annualized dollar depreciation (the DXY is down -3.3% YoY), as the CNY is still semi-pegged to the USD.

 

CHINA TO IMPLEMENT QE? - CPI

 

CHINA TO IMPLEMENT QE? - CONSUMER CONFIDENCE

 

CHINA TO IMPLEMENT QE? - INFLATION

 

CHINA TO IMPLEMENT QE? - FX

 

All told, it remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term. Credit growth remains particularly robust and early indicators such as the MAY Manufacturing PMI data suggest Chinese growth is stabilizing here in 2Q (although ahead of what we see as incremental weakness in 2H).

 

CHINA TO IMPLEMENT QE? - China High Frequency GIP Data Monitor

 

Conversely, China’s property market remains an unmitigated disaster, but it’s unclear to what degree Chinese policymakers are incentivized to rush to shore up an industry they’ve previously identified as suffering from overcapacity anyway.

 

CHINA TO IMPLEMENT QE? - China Property Market Monitor

 

In conclusion, it’s pretty clear that China’s current turbulent growth trajectory is a function of very deliberate policy tightening that continues to be unwound, at the margins, via piecemeal fiscal and monetary easing (i.e. increased public expenditures on infrastructure, PBoC OMO and targeted RRR cuts).

 

The more piecemeal China gets with its easing measures, the less likely it is to shift to a policy of broad-based, meaningful fiscal or monetary stimulus – such as the QE package now being bandied about in the press.

 

Perhaps some form of QE is implemented, but is very small in both size and scope (i.e. confined to certain sectors) – which would effectively render it not that meaningful after all. The cost of capital in China is both artificially low and well shy of recent peaks, so it’s unclear – at least to us – what QE would effectively accomplish.

 

CHINA TO IMPLEMENT QE? - 1

 

If anything, implementing something as radical as QE would likely be perceived by market participants could backfire by sending a signal to the market that they are afraid to use traditional tools to arrest the economic slowdown. We underlined the phrase “afraid to use” because Chinese authorities continue to have ample fiscal and monetary scope to ease policy meaningfully; they just would prefer not to, given that the 2009-10 stimulus package is largely responsible for getting them into this mess.

 

A sharp leg down in growth is indeed something that would obviously walk our expectations towards meaningful stimulus out of Beijing, but that's hard for us to get there without relying on doomsday storytelling and a heavy dose of the availability heuristic (specifically the 2008-09 GFC). 

 

For our latest deep-dive thoughts on China and how investors should (or shouldn't) be allocated to this economy, please refer to our 5/13 note titled, "BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE". 

 

Enjoy the rest of your day,

 

DD

 

Darius Dale

Associate: Macro Team


Poll of the Day Recap: 62% Say Next Stop for 10-Year is 2.25%

Takeaway: 62% said 2.25%; 38% said 2.75%.

From Reuters: U.S. Treasuries yields rose on Monday [to 2.51%], after falling to one-year lows last week, as investors were reluctant to buy bonds that offer low returns on expectations that yields will rise if the economy continues to gain momentum.
 

But, we wanted to know what you thought. Today’s poll question was: What’s the next stop for the 10-year?
 

Poll of the Day Recap: 62% Say Next Stop for 10-Year is 2.25% - fedreserve1
 

At the time of this post, 62% said 2.25%; 38% said 2.75%.
 

Those who believe it will drop to 2.25% said, “inflation is not coming; it’s already here.” Additionally these voters said:

  • "Greater probability 10yr yield falls than rises.  Some factors that point to US Slow Growth: 1. Recent quarter of decreased business spending, 2. Increasing costs drag on US consumer, 3. Lack of US equities volume, 4. Significant draw down in growth stocks, 5. Diminishing impact of foreign buyers of US Treasuries means further monetizing of US spending and, 6.  Possibility of euro strengthening based on overall tighter monetary policy and in response to what the ECB does this week. Simply, US economic outlook is less positive now than Q313 or Q413, so Fed intervention will continue to try to induce consumer spending when most consumers financial situation doesn’t allow greater discretionary spending."
     
  • "US growth is slowing. The Fed will predictably move toward lower rates for even longer. The Fed playbook has one play - easier policy no matter what."
     
  • "European central bank looks like going negative on rates on fears of deflation - can US be far behind?"
     
  • "The Fed will keep printing $$$."
     

Hedgeye CEO Keith McCullough agreed that the next stop for the 10-year would be 2.25%: "The Fed's Policy To Inflate = #InflationAccelerating, and inflation slows growth (bad for bond yields)."

 

Conversely, of those who voted 2.75%, one person explained, "Look at price of wheat, corn etc. since May highs, straight down. That’s deflating your inflation."


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Hedgeye Retail: Wary of Skechers' (Mis)Direction | $SKX

Takeaway: Margins collapse and the company must refocus on its core initiatives.

Hedgeye Retail: Wary of Skechers' (Mis)Direction | $SKX - chart1 6 2 large

 

 Skechers Sponsors California Chrome

  • "Skechers USA Inc...announced today it will sponsor California Chrome’s run at Belmont Stakes in New York on June 7."
     
  • "As part of the sponsorship, Skechers’ logo will appear on California Chrome’s blanket, barn and racing gear, while owners Perry Martin and Steve Coburn, and trainer Art Sherman will wear team jackets, caps and apparel from the athletic brand."
     
  • “'We just watched Meb Keflezighi win the Boston Marathon wearing Skechers Performance shoes in April,' said Coburn, 'so we know Skechers has a good track record when it comes to picking winners in high-profile races.'”  

TAKEAWAY FROM HEDGEYE’S BRIAN MCGOUGH:

We've never seen a brand go in so many directions at once. Performance, toys, horse racing, and NBA ownership. Whenever this happens, there's tremendous operating leverage until the company realizes it has underinvested. Then margins collapse and the company must refocus on its core initiatives.

 

*     *     *     *     *     *

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

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