Despite easy comps, August is coming in pretty weak. At the very least, Q3 won’t be a repeat of Q2.
As we mentioned in our note, “REGIONALS: SHOW ME THE GROWTH, MO" (9/6/11), preliminary revenue data from Missouri may indicate a soft August for the riverboat markets. So far this year, we have three states that have reported August revenues:
- Illinois same-store gaming revenues down 11% against an August 2010 comp of –6%
- Iowa same-store gaming revenues down 1% versus –3% last year
- Indiana revenues down 5% versus –1% last year
- Even Pennsylvania – which we wouldn’t have characterized as mature yet – fell 6% this August in same-store gaming revenues
One fewer Sunday can’t explain the August weakness. Nor can a difficult comp, since regional gaming revenues (riverboat) fell 2% in August of 2010. So what’s going on? We think it is mostly macro. Gaming proved to be one of the most, if not the most cyclical consumer sector in the last downturn. Statistically, housing prices and unemployment have been the most significant drivers of gaming revenues. Unfortunately, housing prices are still declining and unemployment remains above 9%. Looking through this lens, we shouldn’t be surprised.
For the first time in many quarters, we don’t see widespread earnings upside for domestic gaming operators. In fact, some are at risk of missing including ASCA, PENN, and BYD. We still think PNK has enough secular margin improvement and Louisiana exposure to put up another beat but the size of that beat may not be what investors are used to. Sentiment is likely to turn, in our opinion.
PENN looks particularly vulnerable since it has widespread exposure (more negative data points) and more downside to its trough valuation. Estimates for PENN’s PA casino are also looking high given the surprising and severe slowdown there. Finally, being a Wall Street darling now could be a liability on the way down.
The following charts analyze regional gaming revenues on a sequential basis. From this view, the regional performance looks even worse. Depending on the state, sequential performance began to deteriorate in May, June, or July and all three states depicted underperformed again in August.
Below we highlight some of the major call-outs from ECB President Jean-Claude Trichet’s press conference following the Bank’s unanimous decision to leave the ECB’s Main refinancing rate UNCH at 1.50%. In short, he warned of the uncertain global outlook on the horizon, with risks weighing to the downside, including revisions to GDP. In typical Trichet form, he was tight-lipped about future interest rate moves, yet should the global conditions he presented materialize, logic would follow that a cut may be warranted. And we’re calling for global growth slowing!
GDP: according to ECB staff projections, which the Governing Council reviews in making its monetary policy decisions, annual Eurozone GDP for 2011 was downwardly revised to 1.4% - 1.8% vs. the previous forecast band of 1.5% - 2.3%. 2012 annual GDP was also revised down to 0.4% - 2%.
Inflation: as measured by CPI, inflation is expected at 2.5% - 2.7% (Y/Y) for 2011 and 1.2% - 2.2% in 2012, based on ECB staff projections. [or UNCH vs previous estimate for 2011 and narrower for 2012 projection]. With the mandate of 2% CPI as the target rate, Trichet remained confident that this level will be achieved in 2012, while CPI should remain elevated in 2011.
M3: Trends in money growth have stabilized over the last months, with expansion at a modest pace.
Economic Analysis and Risks: Trichet cites the Japanese earthquake; dampening factors of slowing global growth; elevated energy prices; deteriorating global equity markets and business confidence; and remaining tensions due to Europe’s sovereign debt contagion as key factors weigh on the Council’s monetary policy decision.
QA: As is typical, the questions posed at Trichet in the press conference were far more interesting than his prepared remarks for they cut to the heart of many issues plaguing the region, yet little response was given.
On fiscal policy: as usual, Trichet had no comment on fiscal policy, returning to the Bank’s sole mandate of price stability. He mentioned the need of countries issuing fiscal consolidation packages to front-load them. He had no specific comments on the size and scope of Italy’s austerity package, which passed a confidence vote in the Senate yesterday and must clear the lower house of Parliament in the coming days.
On Liquidity Measures: Trichet stressed the fixed rate non-standard measures of the ECB with full allotment on the 1w, 1m, and 3m will be extended into the end of Q4. Here he defiantly states that there are no liquidity issues for Euro area banks on the whole. Among further comments in which he insistence on the health of Euroarea banks, Trichet is in opposition to IMF head Christine Lagarde who recently said that Euro area banks are undercapitalized and a statement from Deutsche Bank’s Josef Ackermann that the current climate “reminds one of the autumn of 2008”.
On SMP facility: Trichet did not comment on the future size and scope of the Bank’s bond purchasing program, which resumed in early August. He reiterated that the Bank will provide weekly totals of its secondary buying, which has included: €22B for the week ended Aug. 12; €14.3 for 8/19; €5.3B for 8/26; and €13.3B for 9/2.
In his closing remarks Trichet noted his respect for the founding principles of the Stability and Growth Pact. In short, it’s clear how politically motivated Trichet is to keep the Eurozone intact, including support of the common currency. Our call remains that should Germany not give the necessary backing to the EFSF, or should a unanimous vote to pass the facility not be met (the timing of which should be late September and early October), the ECB, against its mandate, will likely have to step in to directly and play a larger role to support the sovereign and banking issues across the region. Should this be the case, we could see massive inflation risks in the common currency.
For now, we are not invested in Europe, having covered our short position in the UK (EWU) on 9/6. We continue to see slowing fundamentals not only in the periphery but in the core as well. Additionally, France’s AAA credit rating hangs in the balance. The EUR-USD fell sub $1.39 during Trichet’s remarks and is settling just north of $1.40 intraday. Our immediate term trade levels on the cross are $1.39-1.43, with a broken intermediate term TREND level of $1.43.
In other news, the BOE left its main interest rate unchanged at 0.50% and kept its asset purchasing program unchanged at 200B GBP. We continue to highlight the nation’s sticky stagflation, which should dampen its economic outlook over the coming quarters. While the BOE too could cut rates, the ECB has more room to play with on the downside given its interest rate differential, which is positive on the margin.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Today, Keith bought MPEL in the Hedgeye Virtual Portfolio. The Street is still too low on 3Q and the stock is as cheap as it was at $4.
Keith bought MPEL in the Virtual Portfolio at $12.70. According to his model, MPEL has rock solid support at $12.49 (TRADE) and $11.90 (TREND). Fundamentally, MPEL continues to be a favorite name of ours heading into 3Q earnings for several reasons: 1) Street is ~20-25% too low on 3Q EBITDA; 2) among the Macau names, it is the cheapest (under 8x - same forward multiple as when it was a $4 stock) and has the least downside to trough March 2009 levels; 3) Besides Galaxy, which is feeding off of the opening of Galaxy Macau, it is the only operator to have gained revenue market share since Q2 end; 4) It has 100% exposure to Macau, which is experiencing significant growth.
POSITION: Long Utilities (XLU)
Into month end (August 30th), I wrote a note saying I was moving the Hedgeye Portfolio to net short (more SHORTS than LONGS) for the 1st time since June 23rd. I was looking for a correction of the August month-end markup.
After seeing the correction in the first 6 days of the September, I’ve now covered my Financials (XLF) and Housing (ITB) short positions and moved the Hedgeye Portfolio to one of its longest (net) positions of the year (13 LONGS, 7 SHORTS).
As the math in my process changes, I do. I’m not saying that the SP500 is bullish from an intermediate (TREND) or long-term (TAIL) perspective. I am, however, saying explicitly that the immediate-term TRADE signals here are bullish.
Here are the lines that matter:
- TRADE support = 1158-1182 is the range I am highlighting in the chart (attached); those are higher-lows versus the YTD closing low (1119)
- TRADE resistance = 1230
- TAIL resistance = 1263
So I have been covering and buying again this morning as the probability has heightened that we see 1230 in the SP500 on the next leg up. Manage your risk around the 1158-1230 range proactively.
Keith R. McCullough
Chief Executive Officer
Notable macro data points, news items, and price action pertaining to the restaurant space.
Initial jobless claims came in at 414k for the week ended September 3rd versus consensus 405k and 412k the week prior. The chart below shows rolling claims over the past few years.
The coffee crop in Brazil may rise to 62 million bags in the 2012-13 season as trees enter the high-yielding half of the two-year cycle, according to Volcafe.
- GMCR has been rated “Overweight” with a $117 price target by Piper Jaffray.
- SBUX’s plans for growth in Asia are not limited to China and increasing Via penetration. The company also plans to double its store base in Korea.
- MCD’s remodels in Canada, which we wrote about yesterday, are to include plasma TV’s, fireplaces and completely remodeled exteriors.
- DRI was raised to “Outperform” at Wells Fargo.
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