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THE WEEK AHEAD

THE WEEK AHEAD: August 17-21

 

The Week of the 17th through the 21st had fewer major economic data releases scheduled than the prior two weeks, but there is still a tremendous amount to digest. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

Sunday/Monday August 17

 

US: The August Empire State index will be released on Monday morning, as will Treasury Department Net Foreign Securities Purchases for June.

 

Europe: The Eurostat Eurozone Trade Balance figures for June will be released as will June Retail Sales for Switzerland.

 

Asia: Japanese Q2 GDP data will be released on Sunday evening. On Monday morning Singapore July Export data will be released, while in the evening the RBA August meeting notes will be released giving greater insight into the mindset of Governor Steven’s and his team.

 

Tuesday August 18

 

US: PPI data for July will be released at 8:30 am on Tuesday as will Census Bureau Housing Starts, Building permit and Housing Completion figures for July. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released.

 

Europe: UK CPI and Retail Prices data for July will be released on Tuesday morning, as will August ZEW sentiment indices in Germany.  

 

Asia: Hong Kong Unemployment rate data for July will be released on Tuesday morning.  On Tuesday evening, RBA Assistant Governor Edey will be speaking on the impact of the global financial crisis on the Australian Financial Services Industry.

 

Wednesday August 19

 

US:  Weekly MBA Mortgage application data will be released on Wednesday morning, as will EIA oil gas and distillate stock levels.

 

Europe: The minutes from the BOE August 5-6 monetary policy meeting will be released on Wednesday morning. German PPI data for July is also slated for released on Wednesday: a data point which, although stale, is of key interest to us as we follow industrial recovery in the largest European economy. Eurozone Current Account data for June will be released on Wednesday by the ECB.

 

Asia:  Malaysian CPI data  for July is due on Wednesday morning, with consensus estimates at just shy of -2.5% Y/Y, any surprise to the upside in this commodity driven economy will be of intense interest to any South East Asia inflation watchers.

 

Thursday August 20

 

US:  the Confidence Board Leading Indicator index for July will be published at 10 AM, while weekly Initial Claims, EIA Natural Gas Stock and Fed M2 figures will be also be released through the day at their normal times. At 11 AM, the Treasury will announce 2, 5 and 7 year notes.

 

Europe: A slew of data points will be released in the UK on Thursday morning including July Retail Sales, M4 and CML Mortgage Lending. Also that morning, Norway will release Q2 GDP.

 

Asia:  The big story in Asia on the 20th will be reported Q2 GDP and Current Account data for Taiwan. With the country reeling from the destructive Typhoon, it is likely that government policy makers will use this release as an opportunity to discuss further strengthening of  trade ties with the mainland as the recovery process continues after this setback. Weekly Indian Wholesale Price Index data is reported on Thursday, with levels still registering stubbornly negative in recent weeks there will be continued scrutiny of the figures by RBI watchers. Also on Thursday, Hong Kong will release CPI levels for June.

 

Friday August 21

 

US: July Existing Home Sales will be released at 10 AM. Also at 10 AM, Chairman Bernanke will speak at Jackson Hole on “Reflections of a Year in Crisis”. Expect any statements by “the bearded one” that sound remotely self congratulatory to stoke more pundit criticism for perceived Fed failures. There will be a subsequent fed panel discussion on policy implementation in the afternoon.

 

Europe:  Reuters August PMI data for the Eurozone in aggregate as well as Germany and France in particular will be released on Friday morning. With the recent signals of returning strength in the German and French economies we will be focused on any signals contained in the Manufacturing and, or Services index levels.


BYI: POST CALL TIDBITS

We've got some more color on the sequential decline in participation units, the Haddrill contract amendment, and other tidbits.

 

 

- Hadrill’s new contract:

  • He was originally brought in to “turn around” the Company. Now the board wants him to focus on strategic initiatives and growing BYI
  • Compensation structure was changed to align his incentives to focus on creating “longer term value” and getting him paid in case the company gets bought out before he sees the fruits of his labor. Hmmmm....
  • You know our thoughts here (see the Footnoted post, "BYI: WHY THE NEW HADDRILL CONTRACT?" from 8/13/09)

 

- WAP/LAP installed base decreased in the quarter and over the last few quarters because the company hasn’t released new content in quite a while.  Over the last few months they’ve issued several new titles to go on their Millionaire 7’s and Quarter Millionaire platforms.  Management believes that over time the base of WAP/ LAP games should increase. 

 

- Daily & Rental Fee games decrease

  • Mostly in low fee rental & daily fee games, many of which got converted to for sale or weren’t earning enough to make it worthwhile to keep out there.  Based on our estimate these types of games contribute an immaterial amount to the gaming operations business
  • We estimate that there are roughly 6,500 “premium” rental & daily fee games earning on average $50/day, 2000 Seminole games (in a sale leaseback type arrangement) earning around $20-25/ day, and the balance earn around $10/ day

 

- Increase in Centrally Determined games was driven by Mexico & Washington

 

- Decrease in deferred revenue:

  • Management is trying to be more cognizant not to “bundle” systems and slot sales to avoid unnecessary deferral of revenues
  • A large portion of system sales are “add on” products to existing system which aren’t subject to deferral accounting since deferral revenues are more often associated with new system sales

 

- Apparently, management’s ommission of quarterly detail was accidental


The Tail Charts for Energy

This week we held our monthly strategy call with a detailed discussion on energy.  Setting aside the price fluctuations that might occur in the short term, I wanted to highlight two charts from that call that are very critical for any supply analysis of oil.

 

The first is the long term production chart (which is posted below), which highlights the flat lining of production globally over the past five years.  From 2001 – 2004, global oil production CAGRed at 1.8%, while from 2004 – 2008 it CAGRed at only 0.4%.  The long term average, over 30 years, is for 0.9% annual growth in oil production.  We are clearly seeing a slowdown in the rate of production growth globally.

 

The second chart that is critical is that of global rig count, which has been ramping dramatically for the last 10-years.  Global rig count CAGRed at 5.8% from 2001 – 2004 and then 8.6% from 2004 – 2008.  So investment in finding and producing oil ramped in a period in which production flat lined.

 

Combined, while these two charts and data sets don’t necessarily validate peak oil, but they most certainly validate the fact that oil has become much more difficult to find and will require much more substantial investment than we have seen historically to grow production rates.  These are two facts, and charts, to keep front and center as you position your portfolios for the tail duration on oil (three years or less).

 

Daryl G. Jones

Managing Director

 

The Tail Charts for Energy - oildj

 


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A BETTER TOMORROW

Today’s Q2 GDP release for Hong Kong registered at a 3.3% improvement over the first quarter or a 3.83% decline over Q2 2008. This recovery was driven almost entirely by increased demand on the mainland which brought total exports to over HKD 600 billion for the quarter, although local political intervention did contribute with stimulus measures bringing government consumption up by 1.6% Y/Y.

(continued after chart)

A BETTER TOMORROW - a1

 

As a trading economy, Hong Kong’s exports provide one of the clearer rear view mirror maps of global recovery to date separating the strong from the weak. On a re-export basis (meaning the goods in question originated elsewhere and only passed through HK) shipments to China and Taiwan showed positive year-over-year growth in June by 10.2% and 2% respectively, while shipments to Germany & South Korea  improved sequentially by wide margins (though remaining negative on a Y/Y basis). Meanwhile Chinese made exports passing through Victoria Harbor bound for the UK and US declined in June. 

 

Whether you believe that China’s recovery to date has been wholly artificially manufactured, or believe that it contains the seeds of expanding organic consumer demand, the fact remains that it is real. With today’s confirmation from Europe’s stronger economies that growth is returning there as well, Hong Kong’s ports should now start to see traffic improve in both directions. 

 

Andrew Barber

Director

 


RRGB - THE DRUG THEY DIDN'T NEED TO TAKE

RRGB’s 2Q09 same-store sales came in down 11.5%, representing a dramatic sequential fall off in sales on a both a 1-year and 2-year basis.  Comparable sales growth trends deteriorated further during the first four weeks of Q3, -15.3% versus the +4.4% from the same 4-week period last year.  Management stated that the most difficult comparisons of the year are now behind them, but as we have seen in this environment, easy comparisons no longer seem to matter. 

 

RRGB continues to blame its sales weakness on both the macro environment and the company’s decreased level of YOY spending on national cable advertising.  RRGB should never have invested in national cable advertising because its less than 500 unit store base does not warrant such a high level of spending.  Since its inception, management was never able to quantify the advertising campaign’s returns, but based on management comments, guest count growth was directly related to the level of advertising spending in each quarter.  More importantly, it was directly related to the incremental spending on a YOY basis, which means that the company had to spend increasingly more money to continue to drive traffic higher.  This is an addictive type of spending, which does not yield the necessary returns because the incrementally higher level of spending does not typically generate incrementally higher growth.  Instead, the increased spending is needed to maintain the same level of growth.

 

RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07.  In 2008, the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007.  In 2009, RRGB does not plan to do any national cable advertising and reduced its contribution to the national advertising fund to 0.25% of restaurant sales from 1.5% in 2008.  The chart below shows the quarters when there was no advertising, increased, decreased or even advertising weeks versus the prior year (as shown by +, -,=) relative to reported traffic results.

 

Early on, RRGB's traffic growth benefited from this incremental spending (turning positive in 2Q07 and 3Q07) but went negative again in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07.  In 2Q08, advertising levels were flat with the prior year and traffic continued to decline.  Even with higher levels of advertising spending in the back half of 2008, traffic declines deteriorated further.  Of course, the macro environment had a lot to do with the top-line weakness at RRGB and outweighed the benefit of having incrementally more television ad support in 2H08.  Due to the decline in sales in 2H08, the company could not justify maintaining the same level of investment in national cable advertising in 2009.

 

Last year, we heard about top-line weakness despite increased spending in 2H08 so margins felt the impact of both declining sales and the incrementally higher costs.  This year, RRGB continues to point to the decreased level of advertising as the reason why sales have continued to fall off so significantly.  Most of the questions on the earnings call were focused on a national advertising campaign that does not even exist this year, which highlights the distraction it has become for the company even after the case. 

 

RRGB - THE DRUG THEY DIDN'T NEED TO TAKE - RRGB 2Q09 Traffic

 


LVS: SINGAPORE UPDATE

Resolution of credit issues should lead to more open disclosure of Singapore timeline.

 

As we wrote earlier this week, we have been hearing that LVS’s Singapore opening will be pushed back to June/July from the January/February period that Sheldon Adelson has been mentioning.   We think that, liquidity issues being resolved, a more reasonable timeframe will be outlined and investors will be notified that the property will open once it’s “ready”.  The pressure of needing extra EBITDA to comply with tight covenant hurdles will be relieved and the company will guide to a 2Q10 opening.  For a late February opening, LVS would need to open 50% of the non-gaming gross square area.  According to construction crews on the site, a February opening would require everything to go exactly right (no weather delays, no construction issues, no issues with subcontractors, etc.).


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