As of last Fridays jobs report, there is likely no further public support for any version of QE3 or other liquidity injection that would equate to a prolonging of the Keynesian Experiment that Americans have become all too accustomed to.
Nevertheless, the Indefinitely Dovish nature of the professional politician of 2011 means that, before long, horror stories of “the alternative” will be circulated in a desperate bid to bring QE3 back to the table. For now, though, it seems that we are quite a ways off QE3. Knowing what we know now, it should not come as a surprise that Peter A. Diamond announced in the NY Times over the weekend, that he was withdrawing his nomination to serve on the board of the Federal Reserve. While the title was somewhat off-putting; “When a Nobel Prize Isn’t Enough”, Professor Diamond’s op-ed offered a valuable insight into how many academics think about the current state of the economy and how best to go about bringing about an improvement.
The nomination of Diamond to serve as one of the seven governors of the Fed was bound to spark controversy. Partisan politics certainly played a role as Senator Richard Shelby called the Nobel laureate “an old-fashioned, big government Keynesian” at his nomination hearing. However, the reality of the slowing GDP and Jobless Stagflation has also played a significant role. The notion of growth slowing and inflation accelerating has been at the forefront of our macro view for several months and, as things have played out recently, that call seems to have been a prescient one. Oftentimes amongst academic circles, there is a view that accelerating inflation and slowing growth cannot coincide. While wage inflation has been benign, there is significant inflation in other areas of the economy and it is impacting the ability of businesses to hire. The uncertainty around the cost structure – from healthcare to raw materials – is weighing on business sentiment. That has been Hedgeye’s view and we are now seeing it play out as GDP estimates continue to roll over and management teams highlight inflation as a concern plaguing the near-term outlook.
As Professor Diamond penned on Sunday, “concern about the (seemingly low) current risk of future inflation should not erase concern about the large costs of continuing unemployment.” As we see it, the two economic ills are not necessarily mutually exclusive. It is convenient for some to assume so, but both the 1970’s and the present day tell us that Jobless Stagflation is a real problem for economies that are seeing growth impaired by limitless debt and overly dovish monetary policy. Small businesses, the engine of job growth in this economy, need confidence and not uncertainty.
For some time, in the Early Look, Keith has been outlining the how and the why of the futility of the Keynesian experiment. In late March, I wrote a note on the consumer and Bernanke’s Sisyphean fight to centrally plan the American recovery, titled, “BERNANKE – PEEING INTO THE WIND”. Despite the unfortunate title, last Friday’s jobs report corroborated with the thesis I laid out in that otherwise apropos piece. Confidence is not being lifted by QG and without it we can’t expect the jobs picture to improve materially.
Data released by the BLS pertaining to employment through the month of May shows that the percentage of the unemployed that have been jobless for more than 27 weeks is now at 45.1%. As the debt ceiling debate heats up and cuts to the budget are inevitably made, it will be more and more difficult to offer support to the consumer from the federal coffers.
While it is valuable to have people like Professor Diamond taking part in the debate, it is my humble opinion that the data is refuting his stance and will likely continue to do so. Confidence is far too fragile to support growth and inflation is only further undermining what little confidence exists among small business owners and consumers. While the unverifiable argument will be made, time and again, that “the alternative would have been far, far worse”, I’m not sure the 45% of unemployed people in the U.S. that are facing an increasingly desperate situation are seeing any benefit from the Keynesian Experiment.
Volumes were the driver as VIP hold was only a little above normal.
Total gaming revenues grew 43% YoY and 18% sequentially to HK$23.6 billion, including the first ever HK$1 billion slot month. The growth in May was also impressive in light of facing a difficult growth comp of 93% in May 2010. Galaxy Macau opened on May 15th and drove a lot of the sequential growth. We estimate VIP hold percentage was 3.10%, largely in-line with 3.05% hold in May 2010 and above April’s 2.92% (2.85% is considered normal). If hold was 2.85% in May of 2010 and 2011, the market would have grown 41%.
Encouragingly, Mass Market table revenue increased 36% YoY while VIP revenue increased 44% YoY. This was the best Mass month relative to VIP that we’ve seen since September. No doubt the opening of Galaxy Macau on Cotai was a major contributor to the Mass growth.
Galaxy Macau looks like it had a decent opening, recording about US$116 million in gaming revenues, putting it on pace to generate US$2.4 billion annualized after normalizing VIP hold, which was high. Junket volumes were a little disappointing given how much liquidity the property pumped out to junkets. Still, even after assuming a post honeymoon slowdown, Galaxy should generate an ROI greater than 20%. Overall, a ½ month of Galaxy Macau pushed Galaxy’s market share 340bps above its 3 month average.
Wynn was the market share loser for the month, dropping 360bps from April and down 220bps from its 3 month average share. However, the lost share was mostly due to low VIP hold. Wynn’s junket volume share actually increased slightly versus its 3 month average and its Mass share declined only 70bps. SJM, LVS, and MPEL (in that order) lost the most Mass share while MPEL and LVS were the only companies to lose significant junket volume share to Galaxy. It’s probably no coincidence that MPEL and LVS have sizable operations on Cotai. Sequentially, Wynn and MPEL were the only properties to report lower May revenues than April.
Y-o-Y Table Revenue Observations:
Total table revenues grew 42% YoY this month despite a difficult comp of 97% YoY growth in May 2010, with Mass growth of 36% and VIP growth of 44%. Junket RC also grew 43% in May.
LVS table revenues grew 14% - the slowest of the concessionaires for the third month in a row
- Sands was down 10%, driven by a 17% decrease in VIP and offset somewhat by a 6% increase in Mass
- Sands was impacted by slightly below normal hold, a difficult hold comparison and share loss in RC play. Adjusted for 10% direct play (in-line with 1Q11), hold was about 2.7%, compared to 3.1% hold in May 2010, assuming a 14% direct play estimate (in-line with 2Q10).
- Junket RC was down 2%.
- Venetian was up 34%, driven by a 18% increase in Mass and 44% increase in VIP
- Junket VIP RC increased 45%.
- Hold was high in May but the prior year hold comparison was also high. Assuming 18.5% direct play, (compared with 18.7% in 1Q11) we estimate that hold was 3.8%, compared to 3.5% hold in May 2010 (assuming 24.0% direct play).
- Four Seasons was down 2% driven by a 13% decline in VIP which was mostly offset by 57% Mass growth
- Junket VIP RC decreased 30%.
- Assuming 40% direct play, hold was 3.3%, compared to an estimated hold of 2.2% in May 2010 assuming direct play levels were in-line with 2Q10 at 50%.
Wynn table revenues were up 16%
- Mass was up 46% and VIP increased 11%
- Junket RC increased 38%
- A combination of low hold and difficult hold comparisons negatively impacted Wynn this month. Assuming 10% of total VIP play was direct, we estimate that hold was 2.5% compared to 3.2% last year (assuming 11% direct play)
MPEL table revenues grew 44.5%, driven by Mass growth of 77% and VIP growth of 38.5%
- Altira was up 13% with Mass continuing its tear, up 84% while VIP grew 9%
- VIP RC was up 30%
- We estimate that hold was 2.9% compared to 3.5% last year.
- CoD table revenue was up 71%, driven by 75% growth in Mass and 70% growth in VIP
- Junket VIP RC grew 53%
- VIP growth was assisted by an easy hold comparison and slightly above normal hold. Assuming 14% direct play, hold was 3.0% compared to 2.5% in May 2010, assuming 18% direct play (in-line with 2Q2010)
SJM revs grew 43%
- Mass was up 26% and VIP was up 50%
- Junket RC was up 41%
Galaxy table revenue was up 64%, driven by 120% growth in Mass and VIP growth of 58%
- Starworld table revenues grew 20%
- Mass grew 24% and VIP grew 20%
- Junket RC grew 8%
- Galaxy Macau total gaming revenues for the first 16 days were around US$116MM ($112MM of which was table revenue)
- Mass table revenue of $19MM
- VIP table revenue of $93MM with RC volume of $2,314MM. Assuming no direct play hold at Galaxy Macau was 4%
MGM table revenue was up the most in May - growing 132% (MGM has been the fastest growing concessionaire for the 6th straight month now)
- Mass revenue growth was 39%, while VIP grew 169%
- Junket rolling chip growth also grew the fastest at 150% - MGM has had the fastest growing junket RC volume growth out of all the concessionaires for the last 9 months now
- Assuming direct play levels of 7%, we estimate that hold was 3.10% this month vs. 3.05% in May 2010.
Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots):
LVS share fell 1.3% in May to 15.6% from 16.9% in April. This compares to 6 month trailing market share (excluding May) of 16.7% and 2010 average share of 19.5%
- Sands' share decreased 1.7% to 4.0% - hitting an all-time low share for the property across VIP, RC, and Mass market share
- The decrease was driven by a 1.9% decrease in VIP market share to 3.1%. RC share was 3.3%, down 50bps sequentially.
- Mass market share fell 90bps sequentially to 7.0%
- Venetian’s share ticked up 10bps to 9.3% share
- VIP share increased 20bps to 8.1%
- Junket RC decreased 1.3% to 5.4%, which compares to an average of 6.3% share in 2010.
- Mass share ticked down 10bps to 13.7% hitting an all-time low for the property. 2010 average share was 15.9% and 6 month trailing share is 14.8% for the property
- FS share increased 50bps to 1.8%
- VIP share increased 70bps to 1.8%
- Mass share decreased 40bps to 2.1%
- Junket RC share ticked up 10bps to 1%
WYNN was the biggest share loser in May, with share down 3.6% to 13.2%, driven by a combination of low VIP hold and difficult sequential hold comps. May’s share is below Wynn’s 6 month trailing average share of 15.8% and 2010 average share of 14.9%.
- Mass market share decreased 30bps to 10.7%, compared to an average of 10.1% in 2010
- VIP market share dropped 5.1% to 13.3% sequentially, well below above its 2010 average of 16.0%
- Junket RC share increased 40bps to 15.7%, above Wynn’s 2010 average of 15.2% and 6 month trailing average of 15%
MPEL decreased to 14.2% compared to an average 6 month trailing share of 15.1% and 2010 share of 14.6%.
- Altira’s share dropped 1.1% to 4.9%, compared to 5.6% average share in 2010
- CoD’s share fell 2.0% sequentially to 9.0%
- Mass market share increased 40bps to 10.1%, the properties’ second best share after February's all-time high of 10.3%
- VIP market share decreased 2.7% to 8.7% while Junket RC share decreased 1.6% sequentially to 8.7% (compared with 5.4% share for Venetian).
SJM was the second biggest share gainer in May after Galaxy. SJM’s share grew 2.8% to 32.4%. May share compares with an average share of 31.3% in 2010 and a 6 month trailing average of 31.1%.
- Mass market share decreased 2.1% to 38.0% while VIP share grew by 4.6% to 32.0%
- Junket RC share increased to 33.4% from 32.8% in April
In a reversal of last month’s trend, Galaxy was the largest share gainer in May, with share increasing to 13.2% from 9.0% in April. May obviously benefited from the opening of Galaxy Macau on May 15th . Galaxy Macau benefited from high hold during its first 17 days of operation. May share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 10.1%.
- Galaxy Macau garnered 3.9% market share during a partial month of operations
- Mass market share of 2.9%, VIP share of 4.1% and RC share of 3.4%
- Starworld's market declined 40bps to 7.8%
- Mass market share fell 60bps to 2.2% while VIP share fell 40bps to 9.4% but would have fallen more if not for the high hold this month of 3.14% vs 2.64% in April. Junket RC share dropped 1.7bps to 8.4%.
MGM's share increased 90bps to 11.4%, from 10.5% in April. May share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 11.1%.
- Mass share decreased 20bps to 8.7% - the 3rd highest property share after Venetian and CoD
- VIP share increased 4.6% to 12.0% - the 2nd highest property share (that we track) after Wynn/Encore
- Junket RC increased 1.6% to 11.5%, materially above the property’s 2010 average of 8.4% and its 6 month trailing average of 10.6%
Slot revenue grew 49% YoY in May to $133MM – surpassing the $120MM record set in February
- Galaxy slot revenues grew the most at 241%, reaching $8MM
- At 89% YoY growth, Wynn had the second best growth, impressive given the large base. Slot revenues were $32MM - setting an all-time high for the property.
- MGM grew 72% to $19MM - setting an all-time high for the property
- MPEL’s slot revenue grew 36%, setting an all-time high of $25MM
- SJM’s slot revenues grew 26.5% to $15MM
- LVS grew the slowest at 17% but also set a company high of $34MM in slot revenues.
Conclusion: On an intermediate-term TREND basis, the tight grip of Stagflation continues to choke the Brazilian economy. Furthermore, we see Stagflation as a real risk to Brazil over the long-term TAIL.
Over the last few weeks we’ve been relatively quiet on Brazil, largely due to the data playing out in spades according to our expectations. Growth continues to slow and inflation continues to accelerate, which, in turn, incrementally slows growth.
As you may know, we prefer to analyze slopes rather than absolute values, believing that the 1st and 2nd derivatives of growth rates are often the best leading indicators for the absolute levels of future growth. On a marginal basis, economic conditions continue to deteriorate and we see little signs of reprieve on the horizon. With the Bovespa down over 8% YTD, it’s pretty clear to our Hedgeyes that Stagflation isn’t good for earnings growth in Brazil, nor the multiple the market is willing to pay for said earnings:
While certainly a lagging data point, Brazil’s 1Q GDP report showed that YoY Household Consumption growth slowed -160bps to +5.9%. On a QoQ basis, Household Consumption growth slowed to +0.6% vs. a prior reading of +2.4% in 4Q10 – indicative of the measured slowdown in Private Consumption we had been calling for since November. Furthermore, our proprietary Brazil Consumer Misery Index suggests further downside to consumer spending trends is likely on the horizon:
All told, though consensus estimates for Brazil’s 2011 GDP have come down alongside the government’s forecasts in recent months, we still see further downside to current projections. To the latter point specifically, the Finance Ministry late last month cut their 2011 GDP projection -50bps to +4.5% YoY, as well as increased their 2011 CPI forecast +60bps to +5.6% YoY. Further, the board reduced its 2012 GDP estimate by -50bps to +5% YoY, as well as its 2011-14 GDP projections to +5.1% YoY per annum vs. a previous forecast of +5.9%.
Whether or not this is function of the Brazilian government seeing what we see (the strong possibility that structural inflation takes hold in Brazil) remains to be seen. Time and more data will tell in that regard. For now, we remain bears on real-denominated debt as it becomes increasingly likely that the central government misses it’s deficit reduction target in the current fiscal year due to lower-than-anticipated tax receipts driven by slowing growth. Sovereigns can and do “miss” the numbers (see: Greece, Ireland, Portugal, US, etc.). In April, the Central Government’s Budget Balance missed expectations by 600M reals ($380M). We don’t see that as a one-off event.
While up measurably on a YTD basis, as well as since when we turned bullish on them in early November, Brazilian bond yields have been trending down of late, but that’s likely due to the fact that rate hike expectations are coming out of Brazil’s bond market as growth slows. That’s a dangerous place to be as an investor – buying/selling what you can vs. what you should. Specifically, two idiosyncratic mechanisms regarding Brazilian CPI and wages have us worried regarding the slope of Brazilian CPI for the long-term TAIL:
- Price increases for Services (24.1% of the benchmark IPCA CPI) are automatically increased as a result of indexation, a process whereby past inflation is used as a benchmark for raising prices; and
- Brazil’s minimum wage (currently at 545 reais) is reset based on the previous year’s CPI plus the GDP growth rate two years prior. In 2012, that formula is likely to produce a gain of over +13%. The level of many key payments throughout Brazil – including government pension payments – are determined based on the minimum wage.
Obviously, it’s too early to tell whether or not structural inflation once again takes hold of the Brazilian economy. It is, however, a situation we will continue to monitor closely – especially given the fact that the central bank has been very reactive in nature, rather than proactively quashing inflation in a prudent manner (recall that we highlighted this as a major risk to being long Brazilian equities back in November). If our hunches on the slope of long-term inflation in Brazil prove accurate, both Brazilian equities and real-denominated debt will become less attractive, on the margin, from a long-term perspective.
It may not last but ASCA seems to be bucking the negative economic data and should put up a blow out Q2.
ASCA looks interesting with the recent pullback. We still think Q2 will be a blowout. In the meantime, May state gaming revenues will be released starting later this week and we suspect they will generally surprise on the upside – similar to April – especially for ASCA. Combined with April’s strength, May should provide confirmation of ASCA's terrific near-term earnings outlook. We are currently at $0.52 versus the Street at $0.44 and our number is looking too low. We believe analysts will be forced to raise estimates and there is still a lot of room for ratings upgrades.
The following chart shows how our estimates match up against the Street’s:
State Gaming Revenues
We remain concerned about the macro picture in general but so far in Q2, ASCA has seen no impact. One possible explanation for the recent strength could be the high grain prices which may be helping some of the Midwestern economies. Of course, with significant operations in Iowa and Missouri, ASCA’s customers are certainly tied to farming. Iowa, Missouri, and Indiana could all report May revenues this week, which represents 70% of the company’s property level EBITDA.
Expansion of gaming in Illinois is a real possibility and that would hurt ASCA’s East Chicago casino. However, even if a bill is signed into law, the impact wouldn’t be felt for 3 years or so. For ASCA, East Chicago is the least significant operation behind only Jackpot and supplies only about 12% of the company’s property level EBITDA.
Stock Trading Update
Keith bought ASCA in the Hedgeye virtual portfolio today. He sees short-term upside to $22.19 and intermediate-term support at $19.24.
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