Unfortunately, VIP is on the down slope
- Macau VIP volume has been weakening in 2014. On a rolling 3-month basis, May 2014 VIP RC volume growth had fallen to a mere +4%.
- Mass, on the other hand, has been relatively stable with +35-40% growth.
- But not everyone is having trouble with the VIP business. Galaxy, for example, saw VIP volumes rise 30% in May and is up 32% year-to-date - riding on the tremendous strength of Galaxy Macau.
- On the other hand, MPEL has been struggling on the VIP side. VIP volumes fell 23% and 13% in May and year-to-date, respectively.
- VIP could continue to drag down GGR growth, starting with June.
Going into today’s call we positioned ourselves to be long the EUR/USD, positing that Draghi would likely underwhelm the market’s loft expectations for easing (see yesterday’s Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement; and (5/23) Buying the Euro (FXE). Our call appears to be the right one: the cross maintains our $1.35 support level and bounced higher following Draghi’s press conference as equities rose in tandem.
While the main interest rates were trimmed nearly in line with consensus (44 of 50 economists baked in a negative deposit rate with 56 of 58 expecting a cut in the benchmark rate), no QE was announced. Given, we think the setup portends a dovish monetary response by the Federal Reserve as growth surprises to the downside, which should continue to support our weak USD, strong EUR call.
We applaud Draghi’s issuance today of a new lending program to the “real” economy, named the Targeted Longer Term Refinancing Operations (TLTRO). While we witnessed little to no transmission to the “real” economy from the former LTRO programs, if in fact the TLTROs can be conditionally strong on lending requirements, we’re bullish on them for the Eurozone’s growth outlook. That said, we don’t see the program shifting either the European equity or currency markets in a material way.
Draghi offered a confident tone that today’s interest rate policies moves and the TLTROs could boost the inflation rate to the target of 2.0% (his main concern going into the meeting), yet he did not rule out a potential asset-purchase program as one of several non-traditional alternatives should today’s measures not achieve inflation targets. Interestingly, the Bank’s staff inflation forecasts see inflation only inching up to 1.5% at the end of 2016 – we expect Draghi to keep his back pocket loaded with QE should he need to manufacture higher inflation.
What was delivered in cuts?
- Benchmark Rate: cut from 0.25% to 0.15% (0.10% est.)
- Marginal Lending Facility: cut from 0.75% to 0.40% (0.60% est.)
- Deposit Facility: cut from 0.0% to -0.10% (-0.10% est.)
Draghi on the terms of the TLTRO?
- TLTROs will begin issuance in SEPT and DEC of this year with a maturity in SEPT 2018
- Draghi says intent is to improve credit to the private (non-financial) sector with the ultimate view of price stability that transfers to real economy
- There are provisions that require additional disclosure on use of TLTRO funds; for example, if not compliant with lending to the “real” economy, institution will be forced to repay entire loan after 24 months
- TLTROs not to be used for loans to households for house purchase
Draghi Hints that QE-type Program Targets Asset Backed Securities (ABS)
- Simple (no CDS, CDS squared, CDOs etc.)
- Real (non-derivatives)
- Transparent (all market participants easily understand)
Updated ECB Staff Macroeconomic Projections Head to the Downside
- Growth Projections: in 2014 +1% vs +1.2% seen in March; 2015 +1.7% vs +1.5%; 2016 +1.8% unchanged from March.
- Inflation Projections: in 2014 +0.7% vs +1% seen in March; 2015 +1.1% vs +1.3%; 2016 +1.4% vs +1.5%; 2016 Q4 +1.5% vs 1.7%.
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June is likely to be another soft month in Macau – watch out for week 2
CALL TO ACTION
Macau stocks face an uphill battle over the near term. June should be another single digit growth month and July may be only marginally better. In this note we look at the weekly June comparisons. We caution investors that week 1 could be a head fake as the 1yr/2yr comparison quickly progresses to the most difficult in week 2. We are cautious on the Macau stocks but most favorably disposed toward WYNN for safety reasons and the property’s ability to ratchet up its VIP business in a flat market.
June is a tough comp and we were already projecting 9-11% before May’s softness emerged. The weekly progression is quite interesting. As can be seen on the following chart, the first week is a relatively easy comp followed by a very difficult comp in week 2. Whether the Dragon Boat Festival timing shift (6/12/13 to 6/2/14) is important is debatable. What is clear is that – assuming normal hold – week 2 and 2H of June numbers are likely to look pretty weak on a YoY basis and could further erode investor sentiment. Weeks 3 and 4 individually cannot be relied upon in our opinion since week 3 contained a “placeholder” revenue number in both 2012 and 2013 so week 4 was a catchup in each June. However, combining the weeks is instructive and shows a tough 2H comparison.
INITIAL CLAIMS: BACK AT BEST LEVELS YTD
- The Data: Headline claims increased +8K WoW to 312K with the 4-wk rolling average declining another -3K sequentially to +310K. Non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, came in at -10.8% YoY (vs. –13.8% prior) with the 4-wk rolling average improving 160bps sequentially to -11.3% YoY.
- Context: The rate of change in year-over-year, rolling non-seasonally adjusted claims improved to its best level in seven weeks and is near its best level YTD while rolling SA claims hit their lowest level since June 1st 2007. As a reminder, we typically look at the slope of improvement as our indicator on the prevailing trend in the labor market. Historically, however, the 300K level has served as the lower bound in seasonally adjusted claims during expansionary periods. At this weeks reading of +310K we continue to converge towards that frictional lower bound and expect the rate of year-over-year improvement to slowly converge towards 0% as well.
On balance. the domestic macro data has been better sequentially QoQ, but outside of the discrete ramp in Auto Sales in May (more on that below), there hasn’t been much evidence of material deferred demand from 1Q coming back in 2Q.
The national and regional manufacturing surveys have been ‘good’ and the labor market data (ADP was soft but the trend in claims remains positive) has been stable-to-better.
However, April retail sales were weak, consumer spending in April was particularly soft (see: #GRAVITY: April Consumer Spending), the trade balance for April was worse than estimates (with March revised lower, taking 1Q GDP further negative), and the housing data remains in conspicuous deceleration (see yesterday’s note: Housing: 4th consecutive week of decline in demand).
From a policy read-through perspective, the positive momentum in the labor market along with the broader, sequential improvement in the domestic macro data off the 1Q14 weather distortion suggests the inertia is still with continuing on the present policy course (June FOMC meeting is June 18th).
The improvement in claims also bodes well for the May employment report. While SA claims reported during the BLS survey period (conducted during the pay period including the 12th of the month) were less good than the most recent two weeks, on balance, the May claims data is supportive of a good NFP print.
A Quick Note On Auto Sales:
Total vehicle sales jumped to 16.7M in May (vs. 16.1M est. and 15.98M prior) and auto financing remains one of the only consumer loan categories showing positive growth. However, ongoing loan growth in combination with loosening of credit standards and increasingly aggressive financing options places auto financing (& those levered to it) near the top of the prospective bubble list.
Jeff Williams, CFO of America’s Car-Mart, aptly captured the reality of today’s auto lending dynamics in his comments on 5/27:
“We believe that our customers have never been more stressed financially and, at the same time, have never been presented with more aggressive financing options for their vehicle"
…keep the ongoing auto credit munificence somewhere on your monitoring list.
Enjoy tomorrow mornings manic employment release myopia, May edition.
Christian B. Drake