Taiwan has clearly made a statement by repealing its gaming ban after more than 15 years.  Penghu, Kinmen, and Matsu are possible new gaming jurisdictions.



Referenda coming up in Penghu and possibly Kinmen will determine the fate of gaming in Taiwan.  We believe that the earliest timing of opening would be 2011/2012 with approximately 2,000 slots maximum.  Penghu is the frontrunner at present, with a referendum already scheduled, and the best infrastructure of the three possible new gaming jurisdictions.  The incentives are clear; in the last few years, 5% of visitation to Macau has been from Taiwan.  Below are the details for Penghu.


The Process:

  • Two licenses are expected to be issued
  • The deadline for bidding for licenses is September 21, and the selections will be announced the following day
  • Bids for drawing up a regulatory framework are expected to be announced later this year
  • Bids must include minimum investment levels, the scale of operations, review mechanisms, and potential international investors if any
  • Bids must also address how the proposed project will be differentiated from other gaming markets in the region


The Requirements:

  • Casinos must be established within international tourist resort areas
  • The selected contractor is expected to assist the Minister of Transportation and Communications (MOTC) determine the scope and management of local integrated resorts, including the decision surrounding the mix of gaming and non gaming facilities in future resorts
  • Both domestic and international investment will be welcome but the acceptable percentage of international ownership is to be determined



  • Infrastructure in Penghu (although most advanced of the three possible new gaming locations) needs improvement and ease of travel from China to Penghu needs to be suitable for tourists
  • Airport runway is being extended to accommodate larger passenger jets
  • Charter flights between Penghu and 21 Chinese destinations have been approved and plans to ease visa restrictions for Chinese residents visiting Penghu are underway


Potential bidders:

  • AMZ group has been widely cited as a possible developer. 
    • Navegante Group which operates casinos in Las Vegas and Canada, would be the operator. 
    • AMZ plans on investing $300m to build a give-star 500 room resort in order to win a casino license.  The company owns 11 hectares of land on Penghu.
  • Melco - The head of the Democratic Progressives Party’s Kinmen chapter, Chen Chang-chiang, has been quoted in the press recently as saying that Lawrence Ho toured Kinmen August 7 and expressed a “keen interest” in tapping the market.  Kinmen has also been touted as a possible new casino location.  A referendum on the establishment of casinos may be held there soon (a petition demanding such has been handed in with signatures that need verification).
  • WYNN – We’ve only heard rumors that Wynn is involved but given their success in Macau, it wouldn’t surprise us.


The week of the 31st through the 4th will be busy, with a large number of economic data points scheduled for release in North America and Europe (while Asia will have relatively few).  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.  


Monday August 31


North America

Q2 GDP for Canada will be released at 8:30 am. In the US, August USDA Agricultural Prices and Chicago PMI will also be released on Monday.



Eurozone aggregate and Italian CPI data for August will be released on Monday morning, as will Italian Retail Sales for July. The UK markets will be closed.



On Sunday evening Japanese Production, Shipments and Retail Sales for July, as well as August PMI will be released. Despite all the data, attention this weekend will be focused on the results of the national election as the LDP loses its grip on power after almost half a century.  


Indian Q2 GDP  will be announced on the 31st. CLSA PMI data for August will also be released in China on Monday morning, as will Japanese housing and construction data for July. The 31st will also see the release of South Korean Industrial Production data for July and trade data for August; South Korea is one of our favorite economies to follow and we expect that both production and shipments will continue to improve sequentially. Q2 Current Account Balance figures will be released by the Australian Bureau of Statistics.  


Tuesday September 1


North America

On Tuesday Morning US ISM Manufacturing and Prices reading for August will be published, as will Construction Spending for July and Domestic Auto Sales for August. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released.



Reuters PMI data will be released on Tuesday morning for the Eurozone and its major economy components. Switzerland will publish Q2 GDP on the 1st, while Eurozone unemployment and German Retail Sales for July are also slated for release. BOE lending, mortgage and M4 data for the UK in July will be announced at 4:30 AM EST.



Glenn Stevens will lead the RBA board meeting on Tuesday morning while Australian Q2 GDP will be announced on Tuesday evening. India will announce Trade Data for July while South Korea is scheduled to release FX Reserves and CPI for August.  Japanese Auto Sales data will also be released that morning.


Wednesday September 2


North America

Factory Orders and Inventories for July will be released in the US as will Q2 productivity and Labor Cost data from the Department of Labor. Weekly MBA Mortgage application data will be released on Wednesday morning along with EIA oil gas and distillate stock levels. On Tuesday at 2PM the FOMC notes from the meeting on August 11-12 will be released.  



On Wednesday second release Q2 GDP, Household consumption, Government expenditure and Trade data will be released at 5AM by Eurostat. German unemployment data and UK HBOS House Prices for August will also be released that morning.



A fairly quiet day for economic data in Asia with Australian Good and Services for Jul and August PMI figures from Singapore are the only major releases scheduled.


Thursday September 3


North America

After a slight decline last week, the market will be focused on Initial Claims data for the week of the 28th when it is released at 8:30 AM. ISM Non-Manufacturing and Priced data for August will be released at 10 AM, while weekly Natural Gas stock data will be announced at 10:35 by the EIA (a closely followed data point in the wake of the prior week’s bearish reading). Also on Thursday morning the Treasury Department will announce 3, 10 and 30 years.



Reuters August  Services PMI for the Eurozone and its Major Economy components will be released on the 3rd, as will Eurozone Retail Sales for July. Both France and the UK will be holding bond auctions on Thursday morning (with Her Majesty’s Treasury attempting to place 2.25 GBP Billion in 30 year paper at 4.25%). A regularly scheduled ECB Rate press conference will be held at 7:45 AM.



Another light schedule with Weekly Wholesale Inflation data from India and MOF Q2 Capex data from Japan will be the primary releases   


Friday September 4



North America

Both the US and Canada release August employment and Wage data before the market opens on Friday morning, With the Canadian figures scheduled for 7AM and US data Scheduled for 8:30. At 10 AM August IVEY PMI for Canada will be released.



Italian Trade data for June and Swiss GDP for August are scheduled to be released on Friday morning.



On Friday morning Taiwanese FX Reserve levels for August will be released.


Eye on Cotton

Cotton prices are down roughly 10% over the last 10 sessions to $0.55/lb., though there’s enough vulnerability in the supply chain whereby meaningful weakness through year-end might be tough for the bears to bank on. Heading into ’10, this translates to ‘long pricing power’ and short commodity exposure. 


Stockpiles:  The most recent data point from China, released by the National Development and Reform Commission, was that China imported 131,400 tons in July, which was down 38% yy albeit a slight improvement from 41% yy declines in the 1H. This has led to a tightening of world stocks as reflected in a global stocks-to-use ratio of 51.0% in August down from 51.3% in July. In addition, there has been recent speculation that China might increase cotton volume import quotas over concerns that state stockpiles will not be able to supplement the shortage of supply. Since China is the world’s largest cotton importer, this could be bullish as it relates to future cotton prices.


Production: Global production levels are down with the U.S. at its lowest level in 11 years and estimates for India’s output (world’s second largest producer) is down 15-20% because of drought conditions.


Demand: We’re not making a bull case around global consumer demand, but we find it very difficult to make a compelling bear case. Inventories in the global system of both raw and finished product remain fairly low, healthy, and in synch with current consumer demand. Looking at all the different scenarios, we think it’s more likely than not that demand moves up over the next six months. Inventories are tight around holiday, and then wer’e looking at spring/summer ’10 where we comped against not only a horrible recession, but a weather-impacted period where many consumers simply extended the prior year’s wardrobe. There’s going to be pent up demand at some point.


If we actually start to emerge from this global recession with cotton stockpiles low, production down, and demand picking up on the margin, I’d hate to be on the short side of cotton exposure.


Of course, the theme here will be long pricing power (brands and large retailers), and short commodity exposure (Gildan and to a lesser extent Hanesbrands). It’s too early to see this play out in 2H09, but it will be an increasingly important theme in 2010.


Eye on Cotton - cf cotton 8 09

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Ball Underwater: SP500 Levels, Refreshed...

This week has been a perfect week for whoever chose to sun themselves. The SP500 has done absolutely nothing.


We're grinding in a range. As we grind, the Ball Underwater metaphor applies. The next move is going to be at least 2%. Up or down, I have no idea. Monday is month end, and while it’s unlikely on this Monday, come Q4 “Merger Monday” will be back. Things to think about as you stir that drink thinking what are these guys doing in the office as it’s raining in New Haven.


Immediate term TRADE resistance is 1047 (dotted red line). Immediate term TRADE support is now 1017 (dotted green).


Have a great weekend,



Keith R. McCullough
Chief Executive Officer


Ball Underwater: SP500 Levels, Refreshed... - a1

US Confidence: Another Lower-High...

Coming in at a reading of 65.7, this morning’s Michigan Consumer Confidence number was “better than expected.” The market hit her intraday this morning high on that narrative and has since backed off. That said, the question is why do we care what the Street’s consensus economists “expect”?


We do, but we don’t. We need them to stay in business, but we don’t need to invest alongside their opinions. Using the Street’s consensus macro expectations as a backboard for contrarian investing has been the winning strategy for the past 18 months. Long live Bank of American Merrill Bulls!


If you go back to when all of levered confidence/nonsense started (2006-2007), you’ll see our point.  In the chart below, Andrew Barber and I outline the context of lower-highs.


While it’s true that Consumer Confidence readings of 55 to 70 are abnormal relative to what we have seen in the last 30 years (we called the bottom in confidence in Q1), it’s also true that the US Consumer understands what pending stagflation means to their wallet. The only sustainable breakdowns to the 55-70 ranges in US consumer confidence have come in the late 1970’s and in the 2008-2009 period where oil prices have traded to where they have.


The US government doesn’t want to draw the red line that we have in this chart. But then again, Larry Summer and Christina Romer are running the financial side of Washington forecasting and they have started citing Wall Street’s consensus forecasts as “blue chip.”


The only blue I see in this chart is the color code separating the sad reality of the red line. Contrary to consensus Washington expectations, the American consumer isn’t stupid. Burning The Buck doesn’t get the American Savers and Consumers paid.



Keith R. McCullough
Chief Executive Officer


US Confidence: Another Lower-High... - a1


Contrary to the run up in lodging stocks, real business trends aren't getting any better. Comps are only getting easier.



- Business isn’t improving

  • Stimulus is helping a little bit, with projects in most areas being stimulus driven.  Business isn’t improving sequentially; it just looks less bad as the comps get easier. 
  • As can be seen in the following chart, lodging trends went south in July 2008




- Banks are still looking to reduce exposure to lodging and are reluctant to lend

  • Community banks are in a really bad spot because they have higher exposure to real estate. They have been “extending and pretending” for now, because there is nothing else they can do to avoid defaults.  
  • One owner told us that when his loan came due on a mature midscale asset with 900k of NOI, the best loan he could get was 55% leverage based on a 12% cap and TTM NOI. That equates to less than an 8x EBITDA multiple (since NOI is post property level management costs) and a leverage cap of 4.5x NOI.

- Defaults on large upper upscale assets are picking up

  • We are hearing that actual defaults for upper upscale and luxury properties are accelerating although you won’t really see it advertised in the bankruptcy rags. There are many projects that are getting mothballed despite being fairly far along
    • Fontainbleau Miami
    • Greenbrier (earlier this year)
  • We wonder if this isn't partially driving the recent capital raises we've seen from the likes of HST and the coming Hyatt IPO

Per Keys are starting to look interesting to buyers

  • While per key value is only one of the many metrics we look when valuing lodging companies and assets, some of recent per keys are pretty attractive (to buyers that is) and may be low enough to get the transaction market going
    • HST sold 3 assets this July for just $56K/key. While they are not the most luxurious assets, they are still fairly attractive
    • The 120-room Former Rodeway Inn and Suites in Petersburg, Virginia was just auctioned for $600k or $5k/key ... I'm sure the property wasn't much to look at but this is probably the cheapest per key value that we've seen


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