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Pop, Pop, Bang! German Sentiment Popping

Research Edge Position: Long Germany (EWG)


The ZEW Center for European Economic Research reported today that its August index of Investor and Analyst Expectations rose to 56.1 from a pullback in July to 39.5. This increase for the index, which aims to predict economic health six months ahead, is bolstered by ZEW’s gauge of the Current Economic Situation, which rose to -77.2 from -89.3 in July. (See Chart Below)


The data supports our bullish fundamental outlook on Germany. We believe that Germany’s recent CPI and PPI figures represent a healthy (short term) deflationary environment that benefits both consumers and producers due to the purchasing power associated with imported commodity price declines (bolstered by a strengthening Euro); particularly  cheaper energy costs.  Interestingly, today’s CPI data from the UK for July registered unchanged at  +1.8% Y/Y  -a sequential divergence from Germany’s consumer deflation, which, along with the Eurozone average, stands at -0.7% annually. Our bearish outlook on the UK remains as we believe inflation is getting ahead of growth.


The recent German Q2 GDP release at 0.3% Q/Q has certainly helped to improve sentiment, as the public begins to believe that the recession is passing (or at least that the worst is behind them). Although all economic data is ultimately rear-view, with both Germany and France exiting recession from a technical level, look for countries across the EU to benefit from increased demand and confidence from consumers in the Eurozone’s largest economies. 


Matthew Hedrick



Pop, Pop, Bang! German Sentiment Popping - a1


Chart of The Day: Deflation's Daddy

On the heels of last week’s deflationary US Consumer Price report (-2.1% y/y for July), we just got one of the most deflationary Producer Price reports ever. Yes, by our math, ever, is a long time…


July’s PPI print came in at an eye opening negative -6.8% y/y.


When we talk about the dynamics of y/y price deflation in Q3 versus what we expect to see in Q4, this is the point. Most people forget that last year’s PPI compares are some of the hardest ever. Look at the 2 year snapshot of this picture, then consider it in the context of the 60 years of PPI data that Andrew Barber compiled with our macro team in the chart below.


So, there are three very important points to take away here:


  1. From a Cost of Goods Sold perspective (for some producers) Q309 Earnings are going to be even more impressive than Q209
  2. Deflating costs at a faster pace than y/y revenue growth = economic leverage
  3. This all ends mid-September


Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation.


If you’re short this market right here – you’re short a lot of things that I wouldn’t be short until September. Duration mismatch (thesis versus timing) is really dangerous for a short seller – take it from a short seller who has learned this lesson the hard way.


Deflation is Bernanke’s Daddy. Until Daddy’s music stops, Bernanke will keep hearing the voices of a Depression. Until that stops, he won’t signal a rate hike. Until he signals a rate hike, the Reflation trade will live on…



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Deflation's Daddy  - a1




18 AUGUST 2009




  • HD results appear to have fared better than Lowe’s, with domestic results trending better on both an absolute and sequential basis.  While transactions were up 0.3% and showed a sequential acceleration from 1Q, the average ticketed decelerated slightly and declined 9.3% in 2Q.  The overall US comp decline of -6.9% was measurably better than LOW’s and sequentially better than 1Q results, which were - 8.6%.  On the surface it appears that there are some slight share shifts underway.


  • Lowe’s disappointing same store sales decline of 9.5% for 2Q warrants a look below surface. Most notable was the performance of tickets over $500 (traditionally indicative of larger, more discretionary products) which declined 16% in the quarter. This decline had a disproportionate impact on the average transaction size in the quarter, which accounted for 8.6% of the total decline. Interestingly, same store sales for transactions under $50 were slightly positive. Overall customer count for the quarter was down 0.9%. Management stated that while demand appears to be weakening based on the results, the underlying trend has not shifted dramatically since 1Q. Management believes it underestimated the positive impact last year from the stimulus package, which made comparisons more difficult than anticipated. Regardless of the reason for weaker comps, the results clearly highlight the volatility that still exists in the consumer’s spending patterns. As a result of a more conservative outlook, LOW has decided to cut back its store growth plans until the environment stabilizes.


  • While not traditionally thought of as a Back to School category, CVS is looking to capitalize on healthcare services applicable to students heading back to the classroom. The company is using its MinuteClinic to introduce new services including acne care, sports and college physicals, as well as treatment for minor skin irritations common to students (i.e Lice). So far we have not seen any cross promotions between general merchandise and these services, although it may only be a matter of time before “one stop” shopping takes on an entirely new meaning.


  • Read the fine print… Usually Dick’s online promotional campaigns feature a special “after hours sale” so when we saw the weeklong 20% off BTS ad this morning, it raised a red flag.  But… if you read the fine print you will see that there is really little included in the sale but Danskin women’s apparel tops, Jansport backpacks, and New Balance running shoes.  Looking back to past year’s BTS ad campaigns, Dick’s actually had more items on sale.  We’re always careful not to read into these anecdotes too much, but it does suggest that Dick’s inventories could be tighter than some expect.  In Q2 08, DKS’s inventories grew at twice the rate of sales while in Q1 09 inventories were flat with 5% sales growth. 





-Survey says 47.8% of BTS shoppers were influenced by sales and coupons - According to a survey conducted by the National Retail Federation and BIGresearch released on Tuesday, of those shoppers who have already begun their back-to-school shopping, 47.8% were influenced by sales and coupons. 62.2% of American families who still have shopping left to do said they will head to a discount store. This should bode well for Wal-Mart Stores and Target, but with shoppers waiting longer to make purchases, those benefits might not be realized until September. As of Aug. 11, only 41.6% of American families had completed their back-to-school shopping, according to the survey. This shift into later back-to-school purchases took a toll on some of the retailers that reported second-quarter earnings last week like Macy's and J.C. Penney. Other than the discounters, when it comes to price plays, Aeropostale and Wet Seal are winners. <thestreet.com>


-Cautious consumer spending dampens online sales - Online retail sales in the second quarter were down 4.5% to $30.8 billion from Q2 last year, the Department of Commerce reports. By comparison, total retail sales fell 10.6%, driven by falling gas prices and plummeting car sales. <internetretailer.com>


-Japanese department stores' July sales fell 11.7%, registering their 17th consecutive month of decline - The Japan Department Stores Association said Tuesday that apparel sales of the country’s 272 stores fell 15.6% during the month. The continued weakness of the Japanese economy and a longer than usual rainy season bit into business, especially for swimwear and other summer items, the association said. Earlier this month, Fast Retailing Co. Ltd. attributed a 4.2% decline in July comps to the negative impact of the extended rainy season and an unusually cool summer. Department store sales of men’s wear lost 16.7%, while those of women’s wear shed 15.6%.  <wwd.com/business-news>


-Buy U.K. Supermarkets to Tap Food Price Inflation, Says ICAP Analysts  - ICAP Securities say investors should buy U.K. food retailers, including Tesco Plc and WM Morrison Supermarkets Plc, and sell food manufacturers, to take advantage of “high and rising” inflation starting next year.  <bloomberg.com/news>


-U.K. Inflation Unexpectedly Stays at 1.8% as Computer Game, DVD Costs Rise - The U.K. inflation rate unexpectedly held at 1.8 percent in July as the cost of computer games, DVDs and alcohol rose, a sign the economy is staving off deflation as the recession eases. <bloomberg.com/news>


-South Korean Department-Store Sales Rise for a Fifth Month on Luxury Goods - Sales at South Korea’s major department stores rose for a fifth consecutive month in July as consumers bought more luxury goods and accessories amid signs the economy is picking up.  <bloomberg.com/news>


-New Era Cap Co. Inc., a global headwear and apparel maker acquired privately held apparel manufacturer 5th & Ocean for -  A spokeswoman for New Era said management at Miami-based 5th & Ocean “will remain fully intact,” and that “no restructuring has been decided on yet.”  “The resources and knowledge that New Era brings assures that 5th & Ocean will continue to be the fashion leader in licensed apparel and will continue to provide superior speed-to-market,” said 5th & Ocean ceo Alex Leiter.  New Era, an 89-year-old vendor based in Buffalo, N.Y., said working with 5th & Ocean, a company also known for its Major League Baseball apparel, would enhance the launch of its “New Era Presents Tradition” collection, which supports historically black colleges and universities. Victoria’s Secret Pink and Dallas Cowboys merchandising also have merchandising relationships with 5th & Ocean.   <wwd.com/business-news>


-New president and CEO of Nike's Umbro decided - Jim Allaker, vice president and general manager of Nike U.K. and Ireland, has been promoted to president and chief executive officer of Nike’s Umbro brand. Marc Van Pappelendam, most recently vice president and general manager of Nike Eastern and Central Europe, will succeed Allaker in the U.K.-Ireland post. Allaker succeeds Matthew Cook, who has left the firm. Cook became president and ceo of Umbro in March 2008 following Nike’s acquisition of the U.K.-based soccer brand for $565 million. <wwd.com/business-news>


-Sears and Kmart utilize holidays savings Christmas Club card early - Sears and Kmart are encouraging consumers that there is “no time like the present” to start saving for the holidays with a combined push, launching today (Monday), that touts the retailers’ new Christmas Club card. The program lets consumers store funds on the retailers’ designated holiday card, to be used for Christmas spending. A minimum of five dollars is required to activate the card, and consumers may add additional money either online or in-store. Consumers have till Oct. 31 to activate the card, and Sears and Kmart will offer an additional three percent—to be applied towards the final card value—at the end of the promotion on Nov. 14. At the height of their popularity, Christmas Club cards allowed customers to withdraw and apply a specific amount towards a holiday savings account from their weekly earnings.  With holiday retail sales accounting for as much as 20 to 30 percent of a retailer’s annual revenue, Sears and Kmart are trying to combat a weak consumer-spending environment. The effort spans across TV, online and in-store, including point-of-purchase, and coaxes consumers to save. <brandweek.com>


-Hanes has launched a T-shirt design competition offering the chance to combine creativity with passion for a most worthy cause - Susan G. Komen for the Cure . Through Oct. 26, 2009, participants can enter Passionately Pink-inspired T-shirt designs with messages of hope, love and support for the chance to win a weekly drawing for a $100 Hanes gift card. In addition, a grand-prize winner will receive a $250 Hanes gift card and a screen-printed copy of the winning T-shirt design. Hanes will also make a $5,000 donation in the grand-prize winner's name to the winner's choice of Susan G. Komen for the Cure local Affiliate or Komen Global Headquarters. <phx.corporate-ir.net>


-Columbia Sportswear ventures into e-commerce with new site - Manufacturer Columbia Sportswear revamps its site to sell directly to consumers while supporting retailers with referrals and digital content. <internetretailer.com>


-Crocs and Australia Unlimited settle differences - The long-running legal dispute between shoemakers Crocs, Inc. and Kent, Wash.-based Australia Unlimited, Inc. is over. Crocs and Australia Unlimited, maker of the NothinZ lightweight ergonomic clog, agreed to settle all outstanding litigation between the parties by filing for dismissal of all claims and counterclaims.   <prweb.com/releases>


-Arcandor AG’s days are numbered - The bankrupt German department store, catalogue and travel group said Wednesday it will end its search for an anchor investor for the group on Saturday and instead focus on finding individual investors for its Karstadt department store and Primondo catalogue divisions. Arcandor filed for insolvency, the German equivalent of Chapter 11, on June 9, and proceedings are due to open in September. Despite increasing speculation, Arcandor consistently has stated its intention to keep the group intact. <wwd.com/business-news>


-Asics Corporation posted a 16.0% decrease in revenues for the quarter - Gross margins contracted about 140 basis points, SG&A expenses, which declined 3.2% for the quarter, expanded 460 basis points. Inventories at quarter-end were down roughly 2.5%. <sportsonesource.com/news>


-JEWELRY NAMES FOR SALE - Consor Intellectual Asset Management said it has been retained to find a buyer for the intellectual property assets of two now-defunct jewelry chains, Friedman’s Jewelers and Crescent Jewelers. In addition to the nameplates, other assets in the intellectual property portfolio includes Web site names and addresses and the registered trademark “Say It With Diamonds.”  <wwd.com/business-news>


-YMI EXPANDS APPAREL - Junior denim brand YMI will expand to activewear, tops and dresses for the holiday selling season under a license with HMS LLC. This marks the first licensing deal for Los Angeles-based YMI, which sells its jeans to retailers including J.C. Penney, Belk and Dillard’s. HMS is best known for producing clothing for Ed Hardy and Christian Audigier. YMI estimated that retail prices for its new offerings will range from $17 to $30 for tops, $25 to $60 for dresses and $25 to $75 for activewear such as jogging suits. <wwd.com/business-news>


-MADDEN DROPS EBAY SUIT - Steven Madden Ltd. has dropped a trademark lawsuit against eBay Inc. The firm brought the complaint against the online auction house in U.S. District Court in Manhattan on July 21, accusing the e-commerce giant of trademark infringement because unauthorized watches made by its former licensee, Vestal, were allegedly for sale on the site. However, court records show the footwear and accessories firm agreed to a voluntary dismissal of the suit on Aug. 5.  <wwd.com/business-news>


-This month’s Bangkok International Fashion Fair had many of the characteristics of a typical Thai street fair, save one: Sales - Orders were slow to nonexistent during the 24th edition of the trade event, reflecting the wait-and-see condition of the world economy and the evolving character of Southeast Asia’s largest garment-industry event. The show was open to buyers on Thursday and Friday and to the general public on Saturday and Sunday.  Attendance was up 40% over last year trade visitors from Asia, the U.S., Western Europe and the Middle East were more inclined toward networking than buying. As Thailand’s $18 billion textile and garment industry evolves, it’s being pulled in two directions. Government officials are keen for Thailand to shed its cheap, copycat-producing reputation and offer higher-quality goods. Yet buyers, especially in the current climate, are hunting for bargains to protect their margins.  “We cannot compete with [China] in terms of volume or price, nor do we want to,” said Piramol Charoenpao, deputy director general of Thailand’s Department of Export Promotion, organizer of the Fashion Fair. “We want to be known as a niche producer of quality goods — yarn to finished garments.”  But that’s not necessarily what buyers are after.  <wwd.com/business-news>


-Lands' End is increasing its product line beyond apparel - Lands' End Business Outfitters, a trusted partner for providing high quality branded apparel to companies of all sizes, is increasing its product line beyond branded apparel to now include a wide variety of promotional products. Recent research showed that nearly every company looking to build its brand uses promotional gifts in a variety of categories, specifically drinkware, bags and totes, and writing/desktop instruments. "Lands' End Business Outfitters is expanding our product offering to better serve our customers by providing a single, reliable source of branded products, from polo shirts to drinkware," said John Maher, vice president of Lands' End Business Outfitters. "We have selected items for our collection that are not only useful but also tasteful, professional  and, in many cases, sustainable." The new product line includes items such as drinkware, pens and desk accessories, screen print tee shirts, totes and travel gear and accessories, flashlights, and golf equipment. Each category has an eco-friendly product option for customers. The eco-friendly collection is made from post-consumer, previously used and post-manufacturing materials along with sustainable resources such as cotton and bamboo.  <prnewswire.com>


-The 2nd largest online specialty retailer for intimate apparel offers new website - Bare Necessities, the second largest Internet specialty retailer for intimate apparel, announced the launch of a new lingerie retail website, www.Lingerie.com.  Lingerie.com will offer risqué and sexy lingerie such as babydolls, bustiers, teddies, garters, costumes and more, from brands such as Leg Avenue, Shirley of Hollywood, Dreamgirl and Escante. Lingerie.com will also feature sexy plus size lingerie, and more provocative fabrications such as leather, lace, vinyl and sheer fabrics.  The Bare Necessities flagship site, BareNecessities.com, features the basic bras, lingerie, swimwear and underwear that women wear every day, and is second only to Victoria's Secret among specialty lingerie retailers in online sales volume, according to the 2009 Internet Retailer Top 500 Guide to Retail Websites. Lingerie.com meanwhile will offer a more provocative assortment of lingerie that will be completely different from the assortment offered on BareNecessities.com. Lingerie.com will be a completely separate website from BareNecessities.com, but will leverage the fulfillment, technology, merchandising and customer service infrastructure that Bare Necessities has built over the past 11 years.   <prweb.com/releases>







UA: David McCreight, President, sold 25,351shs (~$606k) less than 20% of total common holdings.    

  • Note: Upon joining the company in July 2008, Mr. McCreight received a restricted stock award with a fair value of $4mm to vest over four installments; 50% after Y1; 25% after Y2; and 12.5% after Y3 & Y4. With the first $2mm of his award vesting as of August 1, 2009, Mr. McCreight sold roughly 25% of his award earlier this week. Also of note is that  he agreed to not sell, for one additional year, the shares that vest after the first year.


BOOT: Joe Schneider, President & CEO, purchased 5,437shs (~$54k) less than 3% of total common holdings.

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Correction, Not Crash

“A man’s feet should be planted in his country, but his eyes should survey the world.”
-George Santayana
Although he was considered an American essayist, George Santayana spent only 39 of his 89 years living in America. He was born in Spain and he, like many global macro investors of today, spent a lot of time surveying the world.
While it’s very difficult for most US centric investors to get away from the glaring levels of groupthink associated with everything that dominates the news flow of their day, that’s definitely a reality that you should be capitalizing on.  Wake up in the morning with a global macro process. Give yourself a competitive edge.
After a 2-day -3.3% low volume correction in the US stock market, you saw plenty of pundits calling for another crash last night. I’ll save the crackberry analysts on Fast Money the embarrassment and not call them out by name. One of those guys is having enough problems with basic pronunciation. It’s China – not “Chinarr.” It’s called a correction, not a crash…
Until we have replaced the CNBC crash calling with a basic understanding that we call these small percentage moves off of higher-YTD-highs, corrections, this US stock market will continue to set up to make higher-lows. Buying Thursday’s highs and selling yesterday’s lows is going to simply expedite the long overdue exit of irrational supply from this US asset management marketplace.
Back to the global marketplace, no you aren’t hearing much about yesterday’s nonsensical “Japan was weak” narrative this morning. Why? Well, probably because Japan wasn’t down last night. One factor model (price momentum) investing has its challenges. You are perpetually chasing price.
In Asia, we saw both Hong Kong and China put on +0.84% and +1.4% stock market moves, respectively, after Hong Kong posted an improved employment picture. At 5.4%, not only is the unemployment rate nominally low to begin with, but it stopped going up sequentially. This, on the margin, is better than bad. We still saw some follow through selling in Taiwan (-2.1%), Indonesia (-2.1%), and the Philippines (-1.4%)… and that’s less than great… but don’t forget how much most of these Asian stock markets are up YTD. Again, it’s called a correction, not a crash…
In Europe, we’re seeing a solid rebound from the 2-day correction after Germany posted one of the best country confidence readings that we have seen in global macro for 2009. Germany’s ZEW Index (economic sentiment) shot straight up to 56 for the month of August. That report was 39.5 in July. This report was the best sentiment reading for the Germans in over 3 years. We’re long Germany via the EWG. Yesterday’s selloff in the German DAX index is called a correction, not a crash…
In Commodities, after hitting a new YTD high on the same day that the Chinese stock market hit hers (August 4th), the US Dollar up move equated to another -1.6% correction in the CRB Commodities Index yesterday. Not surprisingly, two of global macro’s leading indicators (oil and copper) are rallying this morning as the US Dollar stops going up. A 2-week -6% down move in the CRB Commodities Index from its YTD high is called a correction, not a crash…
As the perceived safety trades for US centric investors (US Dollars, US Treasuries) sucked people into buying them high yesterday, I am going to remain on the other side of both of those ideas. Buying things that are actually crashing when they rally to lower-highs is what plenty a smartest fund master of the universe tried last year. It’s called averaging down – and until you can find a bottom, it doesn’t work.
So what am I doing now? Watching… I did my buying yesterday (covered the AAPL short, bought FCX, bought XLB, etc...). The last thing I am going to do is buy them today on the way up. While I don’t think its that generational of a mind shift to be buying low and selling high, I can assure you that it’s currently not a consensus strategy. Why? Primarily because the clients don’t let US centric managers invest that way right now. Durations have been shortened and emotions have heightened, as a result.
Hong Kong (Hang Send Index), London (FTSE), and New York (SP500) are all holding comfortably above their respective immediate term support lines this morning. Those risk management lines are 19846, 4547, and 972, respectively. As I survey the world this morning, I see that 3-factor setup as bullish. What you have seen so far is called a correction, not a crash…
Best of luck out there today,


XLB – SPDR Basic Materials We bought XLB into a -4% down move on 8/17. As the USD continues to burn we want to long its inverse correlation to Basic Materials.

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10 and 8/17. As the Buck breaks we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

COW – iPath Livestock This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

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.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

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.

VXX – iPath VIX As the market rolled over and volatility spiked, we shorted the VXX on 8/13.

UUP – U.S. Dollar Index We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

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.


GC put up another strong quarter last week.  The company finally seems to be executing on what should be a terrific business model.



For its Q2 reported last week, Great Canadian came in line with Street revenue but beat EBITDA expectations.  EBITDA was right in line with our estimate.  Given the subsequent move in the stock, investors clearly liked what they saw.  As we wrote about on June 30th in “TAKEAWAYS FROM A GREAT TRIP TO VANCOUVER” and “GC: GOOD CANADIAN GAMING” on April 4th, we have high hopes for GC heading into 2010.


After a long series of disappointments, this management team has demonstrated a clear ability to adapt to a difficult operating environment.  Over the last two quarters of solid performance, GC management has regained much credibility from an investor’s perspective.  Great Canadian achieved $10.2MM of y-o-y cost reductions in 2Q09 with an incremental $3.6MM of cost savings recognized in the quarter, compared to the $6.6MM of savings achieved in 1Q09.  GC believes that the majority of these cuts will be permanent.  We’ve heard that claim many times in our sectors but, as skeptical as we are generally, we believe that in this case there was a lot of fat to cut.  


The impact of the economic downturn is most visible in lower levels of slot play across the majority of GC’s properties.  GC is looking to refresh their slot product in an attempt to stimulate demand.  As a reminder, the British Columbia Lottery Corporation (BCLC) owns the slots and pays for their replacement.  There are also some new marketing initiatives involving the opening of the Canada Line for River Rock. The completion of the Canada Line, and slot installations at View Royal and Georgian Downs, will eliminate any disruption of construction at those properties.


View Royal will add 120 slots on August 18th and Georgian Downs will add 400 slots on August 26th, followed by an additional 150 slot additions in 2Q2010. Both of these facilities are operating at full capacity on the weekends:

  • We think that View Royal had an average win per day of approx $500
  • Georgian Downs had a win per day in excess of $600 (we think $625)


The Canada Line will begin operating the week of August 17th and GC will complete the parkade in September, and all renovations at its property will be finished by November (2 months ahead of schedule).



Management guided to 32% EBITDA margins going forward, which was above investor expectations. If GC can meet their margin targets they will continue to beat Street estimates, which we think are too low for the rest of the year.


Property level review:

-River Rock Casino revenues were $3.3MM below our estimate and EBITDA was $1.7MM below our estimate, primarily due to low hold on table games

  • Gaming revenues, including FDC funds, were 2.1MM below our projection
    • Table drop was slightly better than we expected, only down 2% y-o-y, however low hold of 18.3% versus normal hold at the property of 22% negatively impacted table win by $5MM
    • Slot coin in was weaker than we expected, down 16% versus our expectation of being down 10%
    • Property level expenses were $1.5MM below our expectations, down 22% y-o-y            

-Boulevard Casino revenues were $0.5MM lower than our expectations; however, EBITDA was a little better than we predicted due to deeper cost cuts

  • Gaming revenues, including FDC funds, were in line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.9MM

-Vancouver Island Casinos’ revenues and EBITDA came in line with our expectations

  • Gaming revenues, including FDC funds, were line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.6MM
  • The View Royal slots aren’t coming in until August vs our estimate of 2Q09

-BC Racinos revenues were in line with our expectations with weak racing revenues offsetting slightly better gaming revenues. EBITDA was $0.6MM higher than our estimate due to lower expenses.

  • Gaming revenues, including FDC funds, were ahead of our expectations by $0.4MM with strength in both table drop and slot coin in driven by the increased gaming capacity at Hastings


VISITOR SPENDING DOWN 5% macaudailytimesnews.com


Visitor spending per-capita decreased to MOP1,527, a 5% year-over-year change for the second quarter.  Mainland visitors spent the most, spending MOP3,564 per capita, while those from Taiwan, South East Asia, and Hong Kong, spent MOP1,705, MOP1,684, and MOP1,112 respectively per capita. 


Compared with the second quarter of 2008, per-capita spending of tourists dropped by 12% to MOP2,088, while that of same-day visitors rose by 2% to MOP471.

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